Apartment Pricing – Low or Realistic

Last week in Whakatane there was a successful mortgagee auction of seven apartments. The receiver managed to sell all the apartments that were offered. There were plenty of people present at the auction, and there was good competition amongst the bidders. Most of the bidders were not from the Eastern Bay. The nationwide high quality advertising no doubt helped to attract the strong interest.

Some people may argue that the prices these apartments fetched were too low. The prices that were paid were market prices. It is normal for vendors or potential vendors to have different price expectations than purchasers. The fact that the prices paid were probably below the cost of construction has nothing to do with market prices. The reality is that the developers had unrealistic price expectations to start with. Those price expectations would undoubtedly have led to them making a handsome profit it they had achieved them.

For investors to buy an apartment there should be the expectation of an economic return on investment. As an example, let’s look at a three bedroom apartment purchased at auction for $250,000. Assume rent at $300 per week. There will be body corporate levies of around $5,000 plus rates and water say $3,000 per year. If we allow $500 for contents insurance, this leaves just $7,100 net. This equates to a 2.84% return on the purchase price, and there will still be other significant costs to allow for. Unless there are significant increases in the property value, there would be little point in purchasing for investment purposes.

There are a number of apartment complexes throughout New Zealand that developers have been unable to sell down fully. Most of these were funded by finance companies with trading banks often being the first mortgage holder. Many of the developers will be insolvent, and receivers will be calling the shots. A search through the companies’ office records will reveal any liquidator or receiver’s reports.

The receiver’s report will detail the debt owed to secured creditors, who most likely will be the IRD, and the banks. Anyone further down the pecking order will probably be out of luck, unless they managed to secure personal guarantees. Typically the personal guarantees will also be worthless as bankruptcy seems to be par for the course, amongst developers. Somehow they still seem to manage living expensive lifestyles in properties associated with trusts. Given that a large number of trusts have a certain amount of intermingling of monies, it would be expected that there will be strong legal challenges made to recoup monies owed.

We expect that there will be more apartments offered onto the market over the next few months. Whether the prices are lower than those paid last week at auction remains to be seen? We suspect that those controlling the funding will simply want out which will depress prices further. The banks will have already written the loans off during their recent good profit period. Purchasers will get what they perceive to be bargains which could make some of them attractive lifestyle investments, particularly any with good water views.  

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.