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18-06-2010

New Plymouth: Investing in the ‘Naki

Landlords.co.nz

Taranaki's main centre is a hive of activity with good investment potential due to the stable nature of the housing market.

Adrienne Jervis reports

Located about half way between Auckland and Wellington, the modern, transformed coastal city of New Plymouth is set against a stunning landscape that stretches from the Tasman Sea to Mt Taranaki.

Its lifestyle is shaped by the geography and strong cultural influences. New Plymouth's 42,405 population makes it the biggest urban centre in Taranaki, one of New Zealand's largest districts. It also has one of the country's largest ports.

Economy

Growing year-on-year, the region's economy consistently performs above the national average. The economy is based mainly on agriculture, particularly the dairy industry, and a flourishing energy and petrochemical industry.

The city's economy started to show signs of recovery over the second half of 2009, led by flow-on effects from investment in the Taranaki region in the oil, gas, and electricity areas.

"With dairy prices recovering, improved farm incomes will also add to the regional economy's momentum," says Gareth Kiernan, managing director of Informetrics.

"These signs of recovery follow a difficult period over the previous year when the region was hit relatively hard by the sharp fall in the dairy payout, which flowed through into the service sectors as farmers cut back on spending."

While international influences are important in determining the region's well-being, particularly food (dairy) prices, Kiernan believes oil prices are less clear cut.

"Whereas most regions would tend to benefit from low oil prices, over the medium-term high oil prices are likely to be more to Taranaki's benefit as they will encourage exploration and investment in the sector."

Interest rates are important for the farming sector, being a major determinant of cash flow and therefore farmers' ability to spend and boost economic activity. But they're less important directly for the residential property sector as house prices are relatively modest compared to the big cities. Debt servicing costs, therefore, are not as big an issue for home owners or investors.

Economic forecast

Infometrics predict New Plymouth's economic growth is likely to be ahead of the national average over 2011 and 2012. The four big contributors to the recovery will be agriculture, mining, electricity and construction. The pick-up in construction essentially lines up with nationwide expectations of recovering building activity as financing conditions gradually improve over the coming year for both residential and non-residential development.

The Taranaki market has been more sheltered from the downturn than most other provincial regions due to oil industry growth. Investment over the last few years in getting the Tui and Maari oilfields online has boosted economic activity and incomes.

These positive influences have helped maintain population growth higher than it was throughout most of the 1990s, and confidence levels in both the broader economy and housing market have benefited as a result. The unique nature of the offshore oil industry also facilitates demand for rental property more than owner-occupied.

Market drivers

Property market drivers include agricultural incomes; investment in oil exploration and extraction; interest rates (though less of a positive of late); housing affordability (also turning back the other way); lack of new residential construction and improving population growth.

Among the negatives is uncertainty about the lingering effects of the global financial crisis and uncertainty about the tax situation for residential property.

Because house prices in the region have not fallen by as much as in many other provincial areas, yields in Taranaki are still below their long-term averages. Kiernan advises a cautionary approach to investing given that interest rates are on the rise and the government is set to make changes around the tax situation for residential property at the budget later this year.

He recommends investors find properties where the numbers stack up given where interest rates are likely to be in two years' time and making no allowances for depreciation.

"The market is not as favourable for buyers as it was nine months ago."

Property values

Based on QV's January statistics, the average sales price in New Plymouth is $337,719. From the peak of the market in late 2007 to the low in early 2009, property values dropped 10.90%, according to the house price index. Since then values have recovered and are now 0.30% above the previous market peak.

QV research director, Jonno Ingerson, says the recent speculation over the possibility of land tax/capital gains tax, has resulted in investors sitting on the sideline until some certainty about the direction these taxes might take emerges. "First home buyers are active in the market, taking advantage of lower interest rates, however countering this are the strict banking lending criteria."

Repeat buyers are active. New Plymouth currently has a lot of properties on the market and buyers are taking advantage of the situation and negotiating firmly with sellers.

Mortgagee sales have been minimal.

There is good demand for well located, level, quality sections and their values are stable. While demand for spec buildings is evident, Ingerson says spec builders are unable to meet this market as they can't raise the finance from lending institutions.

Long-time property investor and principal officer of Taranaki Harcourts, John Christiansen, says the investor market has been good right through the worst of the period, with demand for property around and under the median price.

"The top end of the market has been the only area to suffer."

Investors are mostly local and tend to be area conscious when buying. Christiansen reports yields around 8% to 10% depending on the area. "A very good area might only get 5%. Tenants are generally pretty good and employment is high. There's no problem filling vacancies."

Colin Comber, president of the Taranaki Property Investors' Association, says yields for an average to above average three-bedroom house have improved over the past two to three years but appear to typically sit around 5% to 6%.

"This makes for lean pickings for cash flow positive stand-alone properties. There are better prospects with multi-tenancy properties."

During the 2005-2007 boom these properties were very seldom on the market, but more recently the occasional multi has been offered for sale.

Helen Marriott of Quinovic Property Management New Plymouth says rents are high in New Plymouth compared to other cities of a comparable size due to oil and dairy industry professionals needing short-term housing (one to three years).

"Demand for executive housing has kept rents high across the board. Rents have remained stable over the previous year, with the slowdown not affecting average rents significantly."

While rents vary depending on the area, the weekly rent on an average, tidy three-bedroom home is $330. Properties in the city centre, Fitzroy, Strandon and Merrilands are the easiest to rent out and achieve higher rental incomes, but are generally more expensive to buy. Tenants prefer east side living within walking distance of shops, cafes, restaurants, the coastal walkway and surf beaches. Highlands Park is popular for its Mangorei School zoning, then Brooklands, Vogeltown, Lynmouth and Frankleigh Park. Quick access to the CBD is important to tenants.

Two-bedroom stand-alone houses and three-bedroom family homes are most in demand. Marriott says tenants are becoming more discerning preferring tidy, fully fenced properties with garaging, bath, dishwasher, heating and insulation.

"Good, tidy family homes rent within a few days. The market slows down closer to winter; cold, drafty homes are difficult to rent out."

While Marriott reports the demand for apartments as low and uncertain, particularly in times when major industries are not in a significant growth phase, local property investor Alison Down had no difficulty renting out her most recent purchase: a three-bedroom apartment on the edge of the CBD. The refurbished apartment, rented to professionals for $500 a week, cost $387,500 and generates a 6.70% return.

Harcourts Rentals has 258 properties under management. Property manager, Aimee Yee, says the company currently has a short supply of stock with demand for two, three and four-bedroom properties (particularly two and three bedrooms), which means properties are filling quickly with less vacancy time.

Young couples or singles favour two-bedroom properties; three-bedroom properties are generally filled by small families or single parent families. Four-bedroom houses are typically rented to the oil/gas industry and medical professionals, many of whom come from the UK and South Africa.

Having recently reviewed the rents on all of their properties and suggested several rent increases to landlords, Yee says only a handful opted for rent increases, the majority preferring no increase for fear of losing good tenants.

The market appears to recognise quality, with well-located properties in good condition selling relatively quickly and often for good prices.

"In any market there are always bargains to be found and New Plymouth is no exception," says Comber, who believes the medium to long-term prospects for the property market are very positive.

Independent research suggests both dairy farming and the oil and gas industry and their associated downstream industries have very positive growth. Some employment forecasts have estimated that an additional 16,500 FTE's jobs will occur in the province over the next 20 years in these industries.

"This translates to an additional population of some 40,000-plus from a current regional base of approximately 105,000. Even if the forecasters are 50 per cent wrong, this is still a significant growth prospect."

Source: Landlords.co.nz

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