Tenuous future for Auckland apartments

Martin Dunn says even the well-built, well-placed units will be hit. Picture / Herald On Sunday

Is the Auckland apartment market about to crash? Some parts of it already have, experts say, because rents have plummeted and values are dropping. Other parts are about to.

Many experts think well-built, well-located apartments in carefully maintained blocks will hold their values, but others doubt that.

"Even the good units will be hit," says the man who established his specialist apartment-selling behemoth 15 years ago.

Martin Dunn of City Sales says New Zealanders' "morbid fascination with failure" drives us to see the worst-case scenario for this relatively new phenomenon.

The market has been so strong for Dunn that his firm has even been selling Auckland apartments to Sydneysiders - a trend that Australian ethics crusader Neil Jenman says is simply our revenge on the Gold Coast property sharks who ripped us off a few years ago.

Dodging their steep capital gains tax, stamp duty and other property charges and reaping rewards from spiralling prices has been the reason Queensland and New South Wales investors bought Auckland units, Dunn says.

His firm sold Australians at least 50 units in the past two years. In the winter of last year, without any advertising in Australia, City Sales sold 14 suites out of 28 in the Statesman in Parliament St to Australians.

So will the apartment downturn turn off the Australians? Dunn believes not. "People are going to buy apartments under replacement cost in the next two years and that includes Australians," he predicts.

Influential and well-regarded analysis from a university and a property consultancy both back Dunn and point to trouble.

Massey University's real estate analysis unit found rents in inner-city units had been falling since 2003, mainly because of a lack of tenants and an oversupply of tiny units.

The university is not alone. DTZ analyst Ian Mitchell has calculated that the market is either just at its peak or slightly over the hump and heading south, mainly because of the frenzied level of building work in the past few years.

Large specialist high-rise construction companies such as Multiplex reaped rewards from the apartment boom, riding on an unprecedented demand for inner-city living. Free-market analysts say there are no victims of a crash and no one need regulate or stop the so-called oversupply.

Real-estate gluts and bubbles are part of the market phenomenon and no one knows when the market is fully supplied until the buying stops, they say. But why all the fuss about the issue now?

Two factors combined on Tuesday to result in the sector hitting the news. The first - and by far the most influential - was the major study from Massey University's real estate analysis unit which showed rents in many parts of New Zealand either frozen or falling. A table accompanied the research showing rents on inner-city units falling from $420 to $372 in two years.

This is bread-and-butter research for Massey's Professor Bob Hargreaves, who regularly puts out data on property prices.

The second factor was a little more out of the blue. Also on Tuesday, residential real estate consultant Kieran Trass predicted a 40 per cent price drop, a tactic guaranteed to grab media attention.

"Who is Trass and how is he qualified to talk?" asked one angry letter-writer, adding "A property analyst? Where from?"

The answer is that Trass has spent years studying the property market, advising clients about where and when to buy. His company is Hybrid Group, he is the author of Grow Rich with the Property Cycle, and he has developed a property clock to gauge where we are on the cycle.

Apartments are not his favoured stock. If you become a Trass client, you will get regular emails alerting you to bargains in the 'burbs - cheap suburban houses with the potential for stable tenanting and gradual but steady price increases.

The Mt Eden-based Trass said afterwards that his only motivation for making the predictions was his social conscience and desire to protect the unwary.

"People - mums and dads who have not typically been property investors before - have been contacting me voicing their dissatisfaction at being stitched into poor returns and sold into a market where tenants are only available if rents are dropped considerably from the indicated levels," Trass said after the fuss died down.

"I am not prepared to sit back and watch more mums and dads buy lemons in a heavily oversupplied market which is already experiencing a correction in achievable rents and values."

Trass is still smarting somewhat about his motives being questioned.

"Radio Pacific interviewed me and Martin Dunn and Martin implied that I have been one of the companies selling these properties. This is not the case.

"My property trading company, Hybrid Property Sourcing, is in the business of buying residential investment property and selling residential investment property to our own database of about 5000 investors."

Typically, that property is not an inner-city apartment but more likely to be a suburban home.

Dunn is also still smarting from the exchange.

"It's pretty cruel stuff for someone with a vested interest to be talking of a 40 per cent drop in the market."