Reality Check: Dunedin: the new investors' target

The deep south in the midst of winter does not sound like the hottest property spot in the country, but a growing band of out of town investors are turning to Dunedin as a growth market for their property portfolios.

Aucklander Simon Shreeve, of Platinum Properties, a property portfolio management service, is one of them.

"Dunedin has good three bedroom properties in suburbs that attract good quality tenants," Shreeve points out, "and this makes for a very attractive cash flow, without even taking capital gain into account."

But it is the city's capital gain potential which gained media attention last month. Rolling 12 month figures from the Crown's property information firm, Quotable Value, show that Dunedin's average capital growth reached 22.9%, slightly down from its summer peak in February of 27.8% but well ahead of Auckland's 5.8%, or the other high mover, Hamilton, at 21.2%.

QV spokesman Blue Hancock says there are even bigger movements within parts of Dunedin, with coastal property showing a whopping 39% annualised growth. He does point out that Dunedin was slower to take off when property prices began booming further north, so attributes some of the gain to the southern city being in catch-up mode. The average price in the city is $230,000, still well below the national average of $298,000.

It is this low average which has woken Auckland, and Australian, investors to the merits of southern property. Dave Paterson, QV's area manager for Dunedin and Invercargill, points out that average rentals for a house run at $95 to $105 per bedroom. When good rental houses in some suburbs can be found for $160,000 to $200,000, and interest rates are around 7.5%, the figures start to add up. There is variation within the city - a large five bedroom flat for students can now sell for $350,000 plus, but houses on desirable Maori Hill start at $450,000, with some reaching the million dollar mark.

Shreeve points out an increasing commercialisation of the more desirable rental properties - those in the student suburbs around the university. These properties are traded as commercial concerns, with a capitalisation rate based on annual rental, which is not the normal way to price residential property. A commercial rental which has consistent capital gain and regular, small rental increases would now cost $250,000 or more.

"Not all investments are created equal," says Shreeve. "But there is also sound demand from young professionals and families, so I recommend a mixed portfolio rather than a sole focus on student flats."

Paterson also describes a growing development of new flats and serviced units being developed specifically for the student population.

"These blocks have premium facilities, they're warm and well built, with their own bathrooms and attractive features like shared TV and internet access, all included in the rent," says Paterson. "They're attracting rents of up to $180 for a two person room, much better than the usual student digs."

He notes an increase in vacancies this year, as tenants become more discriminating.

Shreeve and his wife, Anthea Baker Shreeve, have recognised this and developed their business around taking away the guess work involved in sourcing and managing good properties. They buy, manage and even renovate properties for investors who want equity in property and a good cash flow but without the time or skills to do so long distance.

"Property should still be about good cash flow," says Shreeve. "Often people focus on capital gain, but that is just the cherry on top of a good income stream."