Why are investors leaving Auckland? – Kelvin Davidson

Kelvin Davidson explains what is driving many property purchasers out of Auckland and where they are headed.
Kevin:  Looking at the New Zealand market now, and we’ve heard for some time about the phenomenal growth in Auckland. So much so now, that the total return is probably suffering a little bit in some of the suburbs, leading me to believe, anyway, that some investors may actually be looking outside of Auckland.
Kevin:  CoreLogic in New Zealand, and Kelvin Davidson in particular, have been looking at this and produced a report on it. Kelvin, thanks again for your time.
Kelvin:  It’s an absolute pleasure.
Kevin:  Yeah. I’m really interested in this and looking at total return, because most investors want, you know, if they can get the double whammy, that is a good yield and some capital growth. It’s heaven for them. But they may have to now leave Auckland City. What are some of the areas in New Zealand that are actually giving you a good total return, Kelvin?
Kelvin:  Yeah, so you really have to go, as you’ve just mentioned, outside Auckland. The prevailing yields in Auckland are very low, as well as capital value is actually sliding back a bit in some parts of the city.
Kelvin:  So, outside Auckland, I think right now, you’re looking at perhaps, sneak into Hawke’s Bay, certainly down the bottom of the South Island. We know Dunedin and Invercargille are offering pretty good rental yields, as well as some capital growth as well. So yeah, it wouldn’t surprise me if some investors are starting to look into those parts of the country.
Kevin:  Okay, so we’re looking predominantly the South Island, or is there a fair bit in the North Island as well?
Kelvin:  Yeah, there’ll be places in the North Island, too. We know capital growth is really strong and in, say, Whanganui, around Palmerston North, New Plymouth. So the value to buy property in those markets is also a bit lower, and I think there is still more scope for capital growth there. Because of those lower starting values, you’re probably going to be making a higher starting yield. So the two sides of the equation for an investor are probably looking pretty good, as I say, in those other parts in the North Island, too.
Kevin:  Apart from a little bit of stability around 2010, 2013, the gross rental yield’s been almost on a fairly slow decline in New Zealand since what? Since almost 2000.
Kelvin:  Yeah, it has. In some ways, it’s a mathematical thing, you know, property value’s been outpacing rents, so of course the yields are going to fall. Probably in the last six to 12 months, just that situation’s bound to turn around again. I mean, rents haven’t, it’s not anything to do with rental growth really, it just tracks along at a fairly consistent sort of 5% or 6% a year. But because of the slowdown in property values below that growth in rents, we’ve actually seen yields start to rise again. I mean, investors have still been piling in despite these low yields. I think the returns on offer from other asset classes haven’t perhaps been all that good. So property’s still been pretty appealing to investors, and that will just start to get a little bit more appealing with yields rising again.
Kevin:  Now Kelvin, just looking ahead a bit. What do you think will happen with gross rental yields across New Zealand?
Kelvin:  Yeah, I think they’ll continue to rise. There may not be a sort of sharp or significant rise. It’ll be a slow burner because, as I say, rents do tend to be restrained by what tenants can afford. That’s restrained by your income growth, which in New Zealand has been pretty subdued for a while. So I think rental growth will probably track along at that 4% to 5% mark. Values, if they tick along at, say, 2% to 3% a year, then yields will rise, but it’ll be a slow burner.
Kevin:  And what’s the news out of New Zealand given the extra regulations in cost that are being imposed by the government on landlords? What’s the news there?
Kelvin:  Well, so there’s a lot going on. As you’ve said, there’s lots of extra things being imposed, threat of capital gains tax down the line, but lots of different fiddling at the margins that has changed the economics of property investment. But yeah, there’s not a lot of other alternatives. People trust property and want to invest in it. So really from our stance, what you’re really showing that investors are still pretty keen to buy. It suggests that they’re just kind of shrugging off these extra costs or at least taking account of them and still deciding that property’s a good thing to do and still buying.
Kevin:  Kelvin Davidson, senior property economist with CoreLogic in New Zealand. Kelvin, thanks again for your time.
Kelvin:  That’s quite a pleasure.22

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