New phase tipped in apartment investment

By Zoltan Moricz

Friday 13th December 2002

In New Zealand, apartments are the domain of private investors. The situation is different in the US where apartment investments play a large part in the portfolios of major institutional property investors.

Apartments account for 19% of the estimated value of all property held by US real-estate investment trusts or REITs. This represents $US77 billion of apartment investments.

Apartments are the third-largest asset class held by REITs after retail and office properties and are significantly ahead of asset types like industrial property.

These significant apartment holdings are no doubt influenced by the attractive returns they provide their investors.

CB Richard Ellis' analysis highlights that apartments have provided the highest price rises of the main forms of commercial property investments in the US since the early 1990s.

The influence of large investors is seen as a driving mechanism behind the US trend of increasingly large-scale apartment complexes.

In 2000, 8.6% of the US housing stock, or more than 10 million properties, comprised more than 20 apartments, and 70-90% of these larger apartment properties served the residential rental market.

The US trends raise the issue whether a similar investment market could develop in New Zealand.

Up until now, institutional investment has not played a part in the apartment sector. Partly this is because the sector has a prevalence of small-scale projects and fragmented ownership that does not easily lend itself for such investments.

However the market is changing, which should make apartment investments more suitable for institutional investors.

The first change concerns the scale of new developments. The Auckland apartment market is on the cusp of a new phase in its development, highlighted by the unprecedented sizes of some of the proposed new projects.

While in the past major apartment projects of between 100-200 units were usually aimed at the short-stay serviced apartment/hotel market, a feature of the new schemes is that they are aimed more towards the residential rental/owner occupier market.

Currently planned projects include several proposals for units containing more than 200 apartments.

The second change is the emergence of apartment lessees such as Housing New Zealand, which has taken leases on a large number of apartments in a variety of developments for on-letting to their own tenants. These are long-term leases with various rental, management and make-good provisions.

Such leasing transforms apartments into investments more like commercial properties, with which larger institutional investors are comfortable, rather than traditional residential investments.

Apartments represent a possible new avenue for New Zealand institutional property investors, given the US success and the current evolution of the market.

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