Pressure goes on investors to ensure properties pay

Thursday, 28 June 2018

Renters are being warned to expect landlords to want better rental returns from their investment properties, in the absence of capital gains

Compared to house prices, the amount of rent most landlords get from their investments is low. That has been okay while house prices have shot ahead, but now they are stalling, the situation starts to change.

Analysis from Homes.co.nz shows the median amount of rent that investors around the country receive, compared to the median house value. This is referred to as a property's rental yield.

Before the costs of ownership are deducted, the best rental returns of any of the main centres are in Aranui, Christchurch. There, the median rent of $362 provides an annual rental yield of 6.8 per cent of the median HomesEstimate value of $281,600.

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If the same investor put that $281,600 in the bank they could get up to 4 per cent if they locked the money away for four years.

The best yield in Wellington was 5.4 per cent in Grenada North. In Hamilton, Enderley topped the chart with 5.3 per cent and in Auckland, Orere Point returned 4.9 per cent.

In the most expensive parts of Auckland, rental investors were not even getting 3 per cent back on the money required to purchase a property.

From that yield, investors still have to cover repairs and maintenance, the cost of managing the property and any loan interest payments.

'Properties in lower-value suburbs typically generate higher rental yields for less capital investment. It is in these areas where the demand, and the need, for rental properties is highest,' said Homes.co.nz chief data scientist Tom Lintern.

Economist Cameron Bagrie said the situation could not continue in an environment where pressure was increasing on landlords, and the opportunity for capital gains was slim.

Investors have new requirements to insulate properties and the government is moving to give tenants more rights. It is also removing the ability of landlords to claim investment losses against their other income, reducing their tax bill.

To improve rental yields to make investment viable, rents would have to increase, prices would have to fall – or both.

'There is a battle royale starting to open up,' Bagrie said.

Cameron Bagrie: 'There is a battle royale starting to open up.'

'The property market in Auckland is weaker than the official statistics show – anecdotally in some suburbs you hear stories of prices down 5 to 10 per cent.

'But the issue is that the sellers', particular property investors', expectations are based on the old normal. But if you look at where the new buyers are, they are a lot more cash flow than capital gains focused. They need to be, seeing the changes across the market.'

He said that 'Mexican standoff' between the old ways of thinking and the new approach could continue for a while.

'You can probably take [low yields] on the chin if it's a weak market for six to 12 months but the thing at the moment that a lot of people are not realising is that this moderation of a lot of the Auckland market looks like it will become a lot more substantial and put the squeeze on capital gains investors … but they're not getting it.'

Lintern said some investors might also move their attention from the main centres to smaller towns, where returns are usually better.

Property investor and developer David Whitburn said investors could find yield in creative ways.

Returns were higher in the central Auckland area, he said, where there were more apartments. Some investors were using boarding houses or rent-by-the room structures to get more rent. Furnished apartments and student accommodation were also producing stronger returns.

Airbnb was also sometimes used to boost income from a property, although he warned that it did not work for every house.

'If it's got the x factor, maybe by the beach, there are some good success stories but if it's a standard property in Mt Roskill I wouldn't necessarily rate it.'

He said the Auckland rental market still had a lack of supply although the pressure was less intense than before .

Some baby boomers had opted to buy a small apartment outright and then rent it out to give a better flow of income than they could get from cash in the bank, he said.

'They are buying a studio freehold and getting a 6 per cent return on rent and think that's good enough for them.'

Whitburn said ringfencing property investment losses in particular would change investors' approach and encourage them to ensure that each property was 'washing its face', producing enough income to make it worthwhile.

'That said, there will still be people who want them as a shelter, a place to put their money in the hope of capital gains.'

Andrew King, executive officer of the NZ Property Investors Federation, said there was room for rental yields to improve over the next few years.

'We are going into a period of the housing cycle where prices are likely to be mostly static. Rental price changes tend to be more consistent than house prices which can be quite variable. With a lot of cost and regulatory changes, a general negative attitude towards providing rental property and a shortage of rentals, it seems likely that rental prices will continue to increase at a faster rate than usual for the next few years.

'As house prices stabilise and rental prices increases, there is a general expectation that rental yields will increase. Unfortunately this is necessary to encourage people to keep providing rental properties.'