Tumbling towers could rise from the ashes

Bianco off Queen apartments are among about 1000 with ties to Blue Chip. Photo / Janna Dixon

Many Auckland apartments are now selling for less than half their replacement cost and shortly around another 1000 could hit the market for a fraction of their original prices.

Those apartments are in five developments - the Barclay, Bianco, Icon Central, Stadium and Chatham developments, which are the subjects of proceedings brought by around 250 Blue Chip investors.

The investors, represented by barrister Paul Dale, contend their contracts to buy apartments in the buildings are unenforceable, and a six-week trial begins on May 11. If they lose, they may be forced to settle on properties whose values are far below the contract prices.

If they are successful, the building developers ultimately will have to put the apartments back on the market, Dale says.

Martin Dunn of Auckland apartment realtors Citysales fears they may "dump them all" on a market that BNZ chief economist Tony Alexander says is already oversupplied.

Bayleys Research shows demand in the lower-valued segment of the market - generally investor driven and characterised by large, high-rise buildings with smaller, cheaper apartments - is oversupplied, crippling capital growth.

The current Auckland apartment market comprises 17,537 apartments, according to Bayleys Research; of which 76 per cent are residential, 15 per cent are serviced and 9 per cent are dedicated student accommodation.

However data from Statistics New Zealand shows consent numbers for apartment developments in the Auckland CBD have been declining since 2004. And the construction cost was $2599 a square metre in 2007, more than double the cost in 2006.

While the growth rate of the apartment inventory has eased considerably, Bayleys Research is aware of 1230 apartments either under construction or planned for completion by 2013.

Dunn says no more will be built for at least five years - "until the financial services sector is forgiven by mums and dads and finance companies emerge again".

With such limited supply prospects, he expects the apartment market to produce capital gain for the first time.

John Abel-Pattinson, director of Greenstone Group, developer of the Barclay and Chatham developments, says his company anticipated owning the buildings 12 months ago, is in the process of tenanting them and is not under pressure from financiers for quick sales.

Dunn says a flood of ex-Blue Chip apartments would be a blip in a market seeing hot buyer demand anyway.

Citysales holds fortnightly auctions and last week had 25 prospective buyers registered to bid on one property.

With "shoebox" apartments selling for half of what they were originally bought for off the plans, "it's crazy out there," he says. Expats in Sydney and London are bidding by phone at every auction.

A 37sq m, two-bedroom apartment with a carpark fetched $173,000 at a recent Citysales auction, and Dunn says it would rent for $380 per week, giving an 8.9 per cent net return that looks attractive next to the meagre rates on offer for term deposits.

He says the recession has made it cheaper to buy an apartment than to rent it and that they can be liquidated relatively quickly - "if we put something up for auction there's a 90 per cent chance it's sold in two weeks".

Rental demand is strong and there are no vacancies in the city, Dunn says, and apartment investor Ed Meile agrees rental demand is "extremely good".

Overseas students, already a significant part of the apartment rental market, are converging on the city in greater numbers as the New Zealand dollar continues to weaken.

Statistics New Zealand estimates the central city population grew 5.8 per cent to 20,310 in the year to June 2007.

Rachel Dovey, Bayleys residential manager, says urban professionals who buy or rent an apartment in the city are influenced by day-to-day factors such as increasing fuel prices, travel time and affordability for younger or first home buyers.

However, Dovey says banks' restrictive lending criteria for apartments measuring less than 50sq m limits the prospective buyer pool. Banks aren't keen to take on leasehold properties, either.

"That's where you've seen some big price drops across the market," Dovey says. She thinks there is a lack of understanding about leasehold ownership in New Zealand.

Dunn warns prospective apartment investors there are five different types of leasehold apartments in the CBD. Some is leasehold in perpetuity with seven-year rent reviews, while some leases - like those for Princes Wharf - terminate after 50 or 90 years.

"We think investors need to exit leasehold, and it has to be irresistibly attractive price-wise for owner occupiers," says Dunn, who sees leasehold apartments with annual outgoings of $10,000-$15,000.

BLUE CHIP INVESTORS WANT OUT OF THESE DEVELOPMENTS

Barclay: 170 units on Albert St. The developer is Greenstone Group directed by John Abel-Pattinson.

Bianco: 157 units in two towers of 14 and 17 storeys on the corner of Turner and Waverley Sts, just off Queen St above Mayoral Drive. The developer is Norwich Properties directed by Tim Manning.

Chatham: 51 apartments and four retail units over 9 levels on Pitt St. The developer is Greenstone Group directed by John Abel-Pattinson.

Icon Central: 156 units on St Martins Lane, off Symonds St. The developer is Icon Central Ltd, directed by Craig Mudgway and Len Ross of Paxton Pacific Group.

Stadium Apartments: 174 units on 10 storeys on Beach Rd by the entrance to the Vector Arena. The developer is Perron Developments directed by Cameron Marsh and Mark Perriam.