Property investors across the globe braced for impact while opportunists circled in anticipation of distressed openings following the initial hit of global lockdown restrictions back in 2020.

Yet the value of houses and land across Aotearoa skyrocketed some 45 percent in the nine months to December 2021, giving our central bank a huge incentive to begin its tightening of monetary policy faster than otherwise expected.

Globally, property investors completed transactions totalling NZD$3.4 trillion during the pandemic, but now, as mortgage lending rates rise and yields contract Kiwi investors are looking to diversify rather than exit the market altogether.

“Growth in prices for certain residential assets has persisted even as property types such as central city apartments faced headwinds in a world reshaped by the pandemic,” says Suzie Wigglesworth, Bayleys national director of projects and general manager of Auckland Central. “It’s amid these obstacles that investors have become more strategic about their investment choices,” she adds.

INVESTORS REFOCUS

Higher mortgage lending rates are expected to add some $5.6 billion to aggregate household outgoings over the next 18 months. While this is expected to be offset by strong income growth, investors will be refining their search parameters as they hunt for yield.

Phill Sharp, sales manager of New Zealand-based, investor-focused property developer Safari Group says their business of identifying and pursuing development opportunities to deliver long-term value has been challenging in a shifting market.

However, market segments have behaved differently.

“In Parnell, there is an expectation of yield for investors given the comparatively high entry-point and desirable post-code, and we have had to rethink our sales strategy for our Augustus Park project which is currently under construction.

“We’ve just actioned an average haircut of $15,000 for each unit with additional incentives for serious buyers which has been designed to meet the market and provide a sweetener for those considering their options,” he says.

Phill notes the group is seeing buyers remerge after a big market freeze, where finance became more difficult to come by and purchasers sat on their hands in anticipation of a bargain.

“Capital gains were a huge motivation for the market because investors could sit back and watch their equity grow, but they have to be a little more strategic in leaner times,” he adds.

While investors have long identified the benefits of a lower effective marginal tax rate on rental property (compared with other financial assets including bank deposits and equities), recent changes to end interest deductibility have been tasked with levelling the playing field.

Property investors are no longer able to offset their interest expenses against rental income, however, new-build properties are exempt from this and the 10 year bright-line test. This is providing a powerful incentive to buy new.

Similarly, better standards for heating and insulation that will see some 38 percent of landlords face higher costs for compliance and maintenance is an issue side-stepped by purchasing a new home built to the latest specifications.

DOWNTURNS YIELD OPPORTUNITIES

After a period of uncertainty as the residential market shifted gears from astronomical growth to a cooling plateau, Wigglesworth says ‘Mum and Dad’ investors are re-entering the second home market seeking well-managed projects by reputable developers.

“Experienced buyers are once again looking to capitalise on opportunities, and we can see there is a lot of cash circulating the domestic market, as well as an uptick in foreign interest.”

“However, the general public is still proceeding with caution, which has taken the edge off and forced sellers to become more competitive to get a deal over the line,” she says.

Both Bayleys’ Projects and dedicated New Build teams expect emerging suburbs close to town centres and transport hubs will continue to perform strongly, evidenced by council zoning changes that will allow more density in urban areas.

“The Property Council says we should be creating at least 60,000 new homes close to light rail stations in Auckland, and higher build heights of six levels will allow this – making properties in these locations even more desirable for their underlying land value,” Wigglesworth says.

In Auckland, properties ‘upzoned’ under the Unitary Plan in 2014 increased the most in value compared with other locations, highlighting the point that density changes have a demonstrated history of enhancing property values and delivering additional capital gain.

Sharp says the enquiry has also started to pick up in the managed hotel sector, with apartments in hotel leases offering a lower entry point for purchasers, and a fixed income that is attractive to passive investors.

“Within the last week, we have concluded several transactions across our managed hotel investments in Auckland, Wellington and Queenstown with customers noting a diversification of their investment portfolios as a key driver to transact.

“Our international border will be fully reopened from the end of the month, and we are welcoming visitors back to our tourist hubs, with opportunities to capitalise on this across the country,” he adds.

RIDING THE MARKET WAVE

Despite being amidst the down phase of the property cycle, investors remain persistently attracted to bricks and mortar for its appeal as an investment class less volatile than shares, bonds and other financial assets.

A recent research paper released by the Reserve Bank (RBNZ) found the total returns on housing as an investment averaged nearly 11 percent per annum in the nine years to 2009 – higher than any other asset returned in the sample.

Despite this, global economic conditions continue to push the price of debt upward, making financial institutions tighten their belts and less amenable to highly leveraged lending at the same time record building consent issuance looks set to add welcome supply to the housing market.

While this may temper growth for some investors, bright spots exist and the exemption of new-build property from interest deductibility and bright-line rules have seen investors refocus their investment energies.

“Despite the rapid pace of residential construction, the number of dwellings per person remains below the average for the OECD and Kiwis are still in need of new homes.

“With construction costs rising and fewer new developments coming to market opportunities exist for purchasers to invest in projects which are finished or are nearing completion, this will allow them to capitalise on current market conditions and benefit best when we return to the inevitable market upswing,” Wigglesworth says.