Inner city apartments – buy or oversupply?

Inner city apartments – buy or oversupply?

The supply of new Auckland CBD apartment developments will struggle to keep pace with demand.

That is the conclusion of Colliers International’s National Director of Research, Alan McMahon, despite the current influx of inner city developments... and population.

Statistics New Zealand anticipates Auckland’s CBD population will be close to 53,000 in 2031 – nearly double what it was just two years ago. McMahon says assuming a stable household average size of 2.0 - that prediction will require another 11,500 dwellings, or 640 per year, to keep pace with.

In the ten year period from 2005 to 2014 only about 4,250 new apartments – or 425 a year - were sold.

“At first glance the 924 apartment units currently under construction in Auckland CBD, combined with the 1,288 in pre-construction marketing, may appear excessive in the context of 640 units required per annum.”

This year only 210 units have been completed in the CBD with another 73 likely to be completed by the end of 2015.

“Even with another 1,142 further units expected to be completed in 2016, 353 in 2017, and an estimated 639 in 2018 - this four year total of nearly 2,417 doesn’t quite keep pace with assumed conservative demand of 640 every year.”

The CBD apartment market is at least showing a prompt supply response, says McMahon.

“However, exacerbating the potential short fall is the fact that pre-sales are normally required prior to construction – usually this is at least 60% so that these developments will only proceed if demand is proven.
“This self-correcting market mechanism is frequently seen in action, and in the last few months around a dozen developments capable of producing 2,000 apartments have been deferred or abandoned.”

McMahon says the potential under-supply is further highlighted by examining the likely growth in office employment in the CBD based on population growth estimates.

“Around 1,900 additional office workers per annum will not only need 25,000 to 30,000sqm of new office space every year – some of them will want to live in the CBD.

Even if that number is only 10%, it adds an entire third to the potential apartment demand.”

We are also in an economic environment where interest rates are anticipated to stay low for some time and there’s an increasing appetite for inner city apartment living.

“As property-owning households have typically become more prosperous, or at least felt wealthier as house prices increase, an appreciation of higher quality apartment developments has also grown.”

This is evidenced by the strong sales of such developments now being built or marketed, along with an ability to pay for quality.

McMahon says well designed, quality developments, in high-quality locations, which offer a convenient lifestyle, will be the most appealing to inner-city living converts. An increasingly sophisticated public is now beginning to recognise value – rather than basing buying decisions on price alone.

ENDS

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