The CBD apartment market has continued its weakening trend with falling prices and low levels of demand. This sector of the market is characterised with negative sentiment as buyers remain very cautious and discerning, resulting in a thinly traded market. The recent collapse of a number of high profile players in this sector has only tended to reduce buyers’ confidence.

Notwithstanding this there remains good levels of rental demand and rental levels being achieved are relatively high.

Interest in the investment serviced hotel/apartment market is still evident with the completion of the sell down of the Seibel Suites on the waterfront and high pre-sale levels within the Hyatt being good examples of investor interest in this type of product, particularly where guaranteed returns are provided.

However, resales in many purpose-built apartment blocks have seen losses to the original investors of up to 30% and occasionally even more. Examples of this include the Metropolis where recent resales have ranged from losses of around 5% to 20% on the original purchase price and a similar but higher level of loss has been recorded within The Majesty’s Hotel apartment building on Queen Street. Here some of the recorded losses on resale have been as high as 38% or over $100,000 on the original apartment purchase.

But not all apartment developments have suffered a decline over the past two years. The recent Melview Developments apartment block in Scotia Place has seen resales at around a 5% premium over the original purchase price, although two of the latest sales in this block were only at break even level.

A lack of confidence and interest in this sector of the market has also been responsible for the significant decline in building permits issued for Auckland City, as the supply of apartments continues to outweigh demand.

Property Returns

The commercial and residential property markets tend to follow similar cycles and as shown on the graph below the residential house price index and Auckland commercial property returns have recorded a very similar pattern over the past 20 years.

The peaks and troughs of the respective cycles are closely related and tend to follow the economic activity (GDP) from throughout the country. The latest increase in GDP has of course been rural based with the provincial centres the main areas to benefit. Economic growth in Auckland has been at a lower level with a corresponding very mild upturn in the property market. Activity in the property market generally is expected to continue to improve over the next 18 months given the lower interest rates and good margin between lending and return on commercial property, plus the improved affordability of residential housing and investments.

Price increases are however, likely to be weak as there remains an over supply of property in most sectors and little likelihood of any major jump in immigration which would put pressure on demand.