Apartment-itis

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Over-supplied, over-sold – the chickens are coming home to roost in Queenstown’s managed apartment market.

About 30 per cent has been slashed off the value of many managed apartments – units let out for tourist accommodation that include limited holiday use for purchasers – and desperate owners are trying to quit.
Increasingly, banks are stepping in and forcing mortgagee sales.

In the past month, the Real Estate Institute of New Zealand found local agents had 315 apartments on their books.

Says local REINZ president Adrian Snow: “The managed apartment sector is under a lot of pressure at the moment, more so than perhaps any other segment outside of commercial development projects.

“We are seeing a number of stressed and distressed vendors.

“In some complexes, we are seeing asking prices come back in the order of 30 per cent from what some owners paid initially.

“There must be some purchasers who have perhaps regretted that purchase.”

At Pounamu Apartments, two units recently sold for $400,000 and $430,000, including GST – units there typically sold ealier this decade for about $760,000 including GST.

On that basis, the recent sales represent a 43 per cent plunge.

At Peppers Beacon, a two-bedroom apartment recently

sold for $565,000 plus GST, down from an original price of $890,000 plus GST.

Snow says “a significant number of apartment owners are now disappointed with the returns they are seeing”. 

Developers and their agents were often promising buyers a net yield of about six per cent on their purchase price.

Snow: “Today we’re seeing returns ranging from about one per cent to seven per cent, at best, for most of the managed apartment complexes.

“If you’re at the lower end of the spectrum, and probably most of them are, their incomes [from their apartments] are unable to support the finance they’ve got.

“Due to the number of apartments on the market, they’ve really become a bit of a commodity supply, so for those vendors who do wish to sell they’re really left to compete on price.”

Snow notes even owners earning five or six per cent may have struggled as the cost of finance increased in recent years.

Some high-end apartments have kept their value.

However, Snow says he recently sold a five-bedroom Peppers Beacon apartment for just under $1.2m that had a previous recorded price of $2.7m – though he cautions that was part of a property exchange.

Snow has no doubt the market has been oversupplied: “The market’s strongly in favour of the purchaser.

“We’re seeing sales of about 10 apartments per month so it’s not all bad news, but this suggests we’ve got up to three years’ worth of apartment stock on the books at the current rate.”

Local Harcourts principal Kelvin Collins doesn’t beat about the bush on managed apartments: “In hindsight they were over-sold off the plans.”

He says present asking prices are “probably back at reality”.

He suggests, for example, that the Pounamu Apartments were never worth $650,000: “I could buy a house for $650,000.”

“I don’t think they should ever have been bought on [promised] returns – they’re a lifestyle decision.”

Long term, he can see some capital growth but “there’s a lot of vulnerability in that sector of the market now due to the offshore financial situation”.

On the plus side, Collins says apartments have offered visitors an alternative to hotel accommodation – “so overall they’re good for town”.