The stage is set for Auckland's central city apartments to fall in value by up to 40% over the next few years with prices already falling amid an oversupply, according to a property analyst.
Kieran Trass, who's also a director of investment mortgage brokers Hybrid Group says buying into Auckland's CBD apartment market now is equivalent to catching a falling knife.
Auckland's CBD apartment values are already falling because of factors including a severe oversupply, dwindling international student numbers, lack of demand from tenants and subsequently plummeting returns, Trass says.
A flood of supply of apartments available to buy or rent is resulting in a "distressed" market, he says.
"Now may look like a great time to buy into this distressed market as apartments can be bought at prices much lower than their inflated asking prices, but caution in any distressed market is wise."
The number of apartments in the CBD has nearly doubled from that of just two years ago to over 12,000, with another 4,000 under construction and another 3,000 planned in the next few years, Trass says.
He says the number of apartments on the market for sale could increase within the next 18 months to more than 5,000, or 25% of Auckland's CBD apartments.
The current oversupply is forcing down rents and sale prices, Trass says.
For example, a studio apartment in central Auckland whose owners were originally getting $350 a week just over a year ago had to reduce the rent to $200 to secure a tenant for just three months.
Studios of
around 30 square metres which were originally being sold for around
$150,000 are now only worth about $100,000, if you are lucky, he
says.
"Local buyers have all but dried up, as increasing local concern
about the ever increasing dire state of the apartment market, has
become more apparent.
"Many banks only lend 50% of the purchase price of small apartments and some refuse to lend on them at all."
Trass says many of the apartments were sold off the plans in the last few years while being promoted on the strength of the strong influx of international students who needed suitable accommodation.
Many more
are now being sold to investors overseas who are unaware of the
current status of the oversupplied market, he says.
Trass points out there has been a dramatic reduction in the number
of international students choosing to study in New Zealand over the
last two years.
Recent Labour Department statistics show new student levels have
dropped from 30,486 in 2003 to 17,488 this year.
Many of these students were being accommodated in Auckland's CBD within close proximity of many language schools, several which have since closed.
Even more alarming, Trass says, is the large reduction in Chinese student numbers from 14,100 in 2003 to 2,700 in 2005. Many of these students were also located in and around Auckland's CBD.
Trass says some apartment owners are offering rent holidays or free trips overseas if tenants will sign up for just a six month rental term and this is attracting tenants who already live in the CBD occupying older or inferior apartments.
"The short term prospects for Auckland's apartment market look grim as the stage is set for the oversupply of apartments and the undersupply of tenants to continue.
"Many buyers who purchased off the plans are trying to sell their apartments before completion but to no avail as potential buyers are few and far between at current prices."
