City Sales Reveal Unusual Auction Results

You may not think the following apartment would be popular, but latest auction results show that it is, according to figures accessed by City Sales last month, as leasehold apartments begin to find favour with property investors again. And, oddly, if they need repairs for weathertightness or other structural issues, then even better!

A a recent auction, a two bedroom apartment on a leasehold title that was in need of remediation work to repair weathertightness and other structural issues, easily attracted the most competitive bidding of the day and was the only unit at the auction to sell under the hammer, with the bidders being seasoned investors who knew what they were doing. The reason these types of apartments are proving so popular is all in the numbers. The apartment auctioned was a 61 square metre unit with two bedrooms, two bathrooms, a balcony and a car park in the Docks complex which fronts onto Quay Street in Auckland's CBD.

According to QV.co.nz, the unit was originally purchased for $535,000 in 2006 when the building was new. At that time most property buyers had a very poor understanding of how leasehold titles worked and the effect that type of ownership structure could have on a property's value. So it was not uncommon for leasehold properties to sell at prices that were probably much too close to their freehold value.

By the time the property was resold in 2010, there was a better understanding of how leasehold worked, and it fetched 225,000. Then it was resold again in 2014 for $219,900. But that was before the weathertightness and other structural issues requiring remediation work were discovered.

When the unit was offered at auction on May 16 there was quite competitive bidding for it and it sold (fully furnished) under the hammer for $152,000. That's less than a third of its original purchase price. If the cost of the remediation work is treated as a capital cost, the total capital outlay for the unit would be $202,000. The current Rating Valuation for the unit (assessed on a freehold basis) is $650,000.

It's currently rented at $680 a week, providing gross rental income of $35,360 a year, before allowing for any vacancy or changes in rent, which on the purchase price of $152,000 gives a gross rental yield of 23.3%. If you factor in another $50,000 for remediation work it brings the net yield down to 17.5%. Out of that you'd need to deduct rates of $1768.83 a year, the Body Corporate levy of $5132.91, and ground rent of $8893.09, making total outgoings about $16,000 a year. That would leave net rental income of around $19,565.17 a year, which at the total capital outlay of $202,000 including the allowance for the remediation work, would provide a net rental yield of 9.7%.

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