As the cost of stand-alone Auckland houses has rocketed out of the reach of many buyers, attention has turned to apartments.
As the cost of stand-alone Auckland houses has rocketed out of the reach of many buyers, attention has turned to apartments.
For the past year, Beatrice Clarke and Emma Quigan have been wilfully homeless. Every few weeks, they have packed their Mitsubishi Colt to the gunwales and criss-crossed Auckland to house-sit and minister to Bubbles the border collie, Lulu the miniature poodle, Jess the blue heeler cross, various cats, two chickens, etc.
Clarke, a full-time media student, and Quigan, who works for a non-government organisation, initially hatched their plan to live rent-free in return for custodial duties in order to save a deposit for a house. At the time, they were renting a Lilliputian one-bedroom apartment with a coin-operated shared laundry in Ponsonby for $460. The experience is illustrative of the need for rental reform: on the first night of their tenancy, their bed fell through the damp floor into the ceiling cavity of the downstairs neighbour. “The chipboard floor had turned to Weet-Bix,” says Quigan. The pair were forced to sleep on a mattress in the kitchen for a week, with no rent reduction forthcoming, their landlady telling them that the apartment was already a good deal. “Which, sadly, it was,” says Clarke. At night, in their bedroom, from the walls and beyond they heard things: the worrying sounds of water dripping, and the less-worrying sounds of lovedup neighbours. Then there was the temperamental elevator. When they left after a year, notes Quigan, the landlady “whacked up the rent by $100 a week and had 50 people applying for it”.
By then, the twenty-somethings had realised that buying a house in their town was the stuff of dreams. Auckland is ranked the fourth-least-affordable housing market in the world, ahead of London (number 12) and New York (number 21).
Asset prices have decoupled from incomes: a median-priced house now costs 10 times the median household income, according to the Demographia International Housing Affordability Survey; the average price for a three-bedroom house is $920,000. And 40 per cent of residential property is held by owners who have multiple properties. Unsurprisingly, the rate of home ownership, 63 per cent, is at its lowest since 1951.
The figure gains in significance when considering context. The proportion of family assets tied up in property in New Zealand has historically been greater than in many other countries, the United Kingdom included, meaning a sizeable segment of intergenerational wealth has resided in houses, and that family net worth is higher when property is owned. And then, length of housing tenure impacts on health. Renting, in this country at least, is associated with greater mobility, a factor which on its own is detrimental to health and well-being, particularly of the young and old.
But wait, there’s more: a body of research has found that rentals are of poorer quality than non-rentals. In August, a survey conducted by the Auckland University of Technology and Buzz Channel revealed that mould, and the damp conditions that allow the fungi to flourish, was present in 50 per cent of rental properties — and that a lean four per cent of landlords identified the health risk as “important”. Housing New Zealand looks to be among them: several weeks ago, a woman who has lived for a year with her four young children in a Housing NZ semi-detached wooden house in Otara found a mushroom growing in a crevice of her kitchen wall, and on informing her housing manager was told that decontamination and repairs would be “a 21-day job”. In short, owning has decided advantages.
All of which explains why Clarke and Quigan have persisted. After inheriting money last year, they secured a toe-hold in the market: they paid a 10 per cent deposit of $62,250 for an elegant Cheshire Architects-designed 51sq m apartment in the city-fringe Skhy project with an 8m balcony, a storage unit and a car park, due to be ready by 2020 at the latest.
The deeds are possibly in the boot of the Mitsubishi and are likely to be for the foreseeable future as they save to service their impending hefty mortgage.
Auckland’s apartment market is lively. Two years ago, 70 apartment projects containing 4700 units were being sold off plans, or had building consents, or were under construction. This year, numbers
It is damn near impossible to buy land, fund the purchase, design and attain consents, build apartments and make a profit.
have swelled to 120, with 8600 units. Low-rise walk-up apartments (vertically attached) and also terraced housing (horizontally attached) are appearing — both styles usually costing less than traditional apartment blocks, which if four storeys or more by law require pretty-penny elevators and sprinkler systems, for instance. The proliferation is a sign of our maturity, says Ludo Campbell-Reid, the general manager of Auckland Council’s design office: “New Zealand is a young country and Auckland was a bit like a juvenile delinquent, unsure of its personality.”
Apartments provide adult options, Campbell-Reid says. Baby boomers, for example, “can spend their lives mowing their lawns, trimming their hedge and creating topiary [he’s from England], or they can live in the centre of the city, where they can walk to the opera, to the philharmonic orchestra, to the waterfront, to shops”.
Auckland needs quality four- to five-storey apartment blocks to fill “the missing middle”, he adds — the transitional area, that is, between the quarter-acre sections and the multistorey apartment blocks in the central business district. With the Unitary Plan now operative, such median-density housing is permissible. Many Kiwis, says Campbell-Reid, are aware of the virtues of apartment living having travelled to Sydney, Melbourne and beyond, where such housing is de rigueur and often associated with vibrancy, diversity and affordability.
The urban planner was appointed to the job 11 years ago, shortly after a nadir in CBD apartment building and the ensuing public outcry over the helloNorth-Peckham-Estate-minus-the-greenery towers hurled up in Nelson, Hobson and Union Sts. (“Apartments threaten to turn into ghettos,” the Herald declared in 2005.) Reportedly and famously, one of the developers responsible said that he would never live in a city that allowed him to do what he does. An industry source, who for reasons related to job retention prefers to remain anonymous, sheds light: “You’ve got to remember there’s a kind of a sociopathic quality to some developers. They just don’t give a shit: it’s just about money. Economic arguments are very convenient because they are easier arguments to make, but for a developer to take on the economic argument and the aesthetic urban argument is very brave and bold.”
Ted Manson, patriarch of the dominant Auckland commercial property developers Manson TCLM Ltd, elucidates further: “It is damn near impossible to buy land, fund the purchase, design and attain building consents and then build blocks of apartments and make a profit.” The reasons being that land is expensive, bank funding is hard to get, and construction costs have increased by 18 per cent in the past year alone. As a result, “developers take shortcuts … and as we know, when times get tough or properties leak, they all go bankrupt”. It’s a situation, says Manson, that needs local and central government intervention (more later).
But Campbell-Reid has faith: “Hand on heart”, every single new apartment development that’s gone up across the city and in the region in the past six years is well designed, due in part to the council’s peer-reviewing Urban Design Panel, he says. It’s a view corroborated, sort of, by Richard Goldie, director of Peddle Thorp architects, currently at work on five apartment blocks, including two in the transitionally situated Mt Eden. “The difference between an ugly building 15 years ago and an ugly building now is that it probably won’t leak because the checks and balances in place now are extraordinary.”
But before we get carried away and reimagine Auckland as a city populated by beret-wearing, croissant-eating Le Figaro readers, the present bustle in the market requires qualification, alluded to by Manson above: 15 per cent of apartment projects fall over, reports Tamba Carleton of CBRE Research. The multimillion-dollar Flo apartments in Avondale are a case in point, folding last year reportedly because of financing issues and rising construction costs. Most apartments are
financed by a combination of presales and bank loans. The former, says developer Mark Todd, director of Ockham Residential, are commonplace throughout the world. “It’s the only way to get it done. No one is going to spend $60 million on an apartment building with no presales.” As for bank financing, it’s generally accepted that the second-largest cost after construction is finance, says Goldie. In the case of a large-scale apartment block of 20-30 units, banks require a 25 per cent return on costs, says Todd, shunting the meaning home: if the project is worth $100 million, it can’t cost a developer more than $80 million.
That the banks are risk averse is understandable, says Todd. The sector is reminiscent of the sharemarket in the late
80s — all yee-haw! with “unconscionable” contracts that favour developers, lead to “spectacular train wrecks” and result in loss of confidence (the public’s and the banks’), which in turn drives costs because the banks then require that 25 per cent return. Consequently, notes architect Goldie, few developers (Todd being one of them) can make a project feasible without selling apartments at less than $12,000 a square metre, which means a modest two-bedroom unit of 80sq m costs almost a million dollars.
Todd paints an explanatory picture: after viewing the plans and/or models of an apartment project at a display suite, a person signs a contract, which goes unconditional in five to 10 days. Meanwhile, the developers have 12 months to declare their side of the contract unconditional, depending on whether presales and bank finance are secured. By then, the purchaser has been on the hook for a year. If the project then proceeds, says Todd, the developers can ask the purchaser for another 15 per cent deposit 18 months in — which has happened on a number of projects around Auckland in the past year, he notes — and possibly cancel the contract. Sure, the deposit — held in a lawyer’s trust account that yields about two per cent — will be returned, but crucially the bloodied purchaser is back to square one.
Escalation clauses and extended periods of due diligence just shouldn’t be in presales contracts, Todd says. Nor should projects go to market without resource consents and/or with no real commitment from financial institutions, both of which occur. “There’s no protections in favour of the public, which makes it a boom-or-bust cycle, because everyone is scrambling to get projects sold ... because you’ve got to get them sold to get finance.”
What New Zealand lacks is patient capital, says Graeme Scott, an ASC Architects consultant and chair of one of Auckland Council’s design panels. Or, landowners/investors who will forgo the quick buck in anticipation of substantial returns down the road, in three centuries or much less. Scott enlists the exemplar of the Howard de Walden Estate, which owns most of Marylebone in central London, in existence in one form or other since 1715. The copy below the heading “Longevity” on the estate’s website reads like an iwi mission statement: “The Estate’s approach is far-sighted and highly
strategic, with an emphasis on building value over the long term rather than maximising short-term profits.” By contrast, says Scott, here the developer has to buy the land, using borrowed money from the bank, ramping up costs dramatically. That’s why time is the enemy of the developer, because the more time it takes, the more it costs to finance. But if the imperative is for swift sales, says Scott, so is the imperative to adopt a low-risk strategy — to just hold onto the land, do nothing, and watch the value climb.
But to rewind to those presales contracts, Todd’s number-one tip for those contemplating buying off plan is to “check out the credibility of the developer”. Goldie has other suggestions: scrutinise the sale-and-purchase agreement as the developer may have flexibility in terms of what they ultimately deliver. They may, for instance, have the right to substitute reconstituted stone for marble, but probably not to install a bloody great pillar in the bedroom (as happened in a 14-storey New Lynn tower in 2014, the imposing structure a surprise for buyers, who claimed it was not on the original plan). Investigate the developer’s track record, or better still, whether they have one. There is a misconception that developing is a windfall game. It’s not, says Goldie. “The best developers are businesses and they do development after development after development because it’s fundamentally a cash-flow game. Sure, they make a profit but they carry big overheads.” Then, advises Goldie, check out the architects, the engineers and the builder “because none of those people get there on their own”.
An alternative hard-line position to that of the developer and the architect is offered by Bill McKay, a senior lecturer at the Auckland University School of Architecture and Planning: “Don’t buy off plan.” Buy on the secondary market, where you know what you are getting and can do due diligence by rummaging through the body corporate records. But note that body-corporate legislation is a mess, and the legal entities are often rent with factions and prone to highjacking by “a couple of members who get a bee in their bonnet” about replacing perfectly good carpet in communal areas, for example, and land you with a stonking bill.
If feeling audacious, however, McKay advises heeding the New Lynn pillar episode — before buying off plan, engage an architect or building surveyor to study the building-consent drawings, not the drawings put about by the realtors. And one thing about those banks, says Eeyore McKay. They are all Australian. Word on the street is that the big four — ANZ, ASB, BNZ and Westpac — are overleveraged in Melbourne and Sydney and as a consequence are not lending here. “So
Investors are the primary reason for residential property increases in Auckland since the early 1980s.
you look at all the cranes building apartments on Great North Rd. That’s not the beginning, that’s the end.”
For many reasons, then, apartments appear a high-risk, expensive business for all concerned. Some are calling for a major rejig of the landscape, and for a showing of political clout. In August, at the Pullman Hotel, 100 people, referred to in promotional material as “the developers, the suppliers, the influencers, the thinkers, the policy makers, the funders, the community-housing providers and the public sector”, met to discuss Auckland’s housing crisis, quantified by a shortfall they were told was 35,000 dwellings and a need to build 10,000 social houses in the next decade. Participants sat at tables — labelled for a laugh “Screwdriver”, “Allen Key”, “Stud Finder” — and listened to Ted Manson, who may have undergone a Pauline conversion.
Manson, family worth estimated at $550 million, heads up a charitable foundation and is one of those rare characters deploying patient capital. Construction was under way, he told the audience, on 260 apartments in central Auckland and in Glen Eden. Sixty per cent of those will be reserved for social-housing tenants, who will pay no more than a quarter of their income on rent. The rest will be sold to owner-occupiers: “I don’t want to sell to investors if I can help it,” said Manson, who also gave an uncomplicated serve to the Not In My Back Yard crew abroad in Glen Eden: “They have got to get over themselves. The rich can live with the poor ... we need to build more houses and we can’t build them on quarter-acre sites anymore. If the zoning allows for three or four buildings on an existing state-house site, that’s the way life is.”
While Manson supported the Reserve Bank’s recent upping of the LVR (loanto-value ratio) minimum for investors to 40 per cent, he wanted more: the introduction of a muscular capital gains tax, characterised by former prime minister John Key as a hard sell in an electorate with half a million swing voters, most of whom are baby boomers who own multiple houses. “Property investors are the primary reason for residential property increases in Auckland since the early 1980s,” Manson tells Metro.
“Investors only ever buy for capital gains. If they say they buy for the return, they are not being truthful. With returns averaging three per cent, what’s the point if there’s no capital gain as well?”
Manson is familiar with the behaviour: investors buy a rental, watch it increase in double-digit figures in value per annum, have it revalued, raise more money against the increase in that value, and buy other rental properties. Any losses along the way can be claimed
Investors only ever buy for capital gains. If they say they buy for the return, they are not being truthful.
against personal income. Currently, there is a capital gains tax by any other name, Manson says, on property other than the family home if sold within a two-year period. Increase it to 10. “If double-digit capital gains were stopped, it wouldn’t be the end of the world for investors. The law of nature would reset who buys property in Auckland and why. It’s time for the wealth to be shared out more equally between the haves and the have-nots.”
Manson has many other ideas, prominent among them the need for local and central government to make public land available for social housing, either retaining ownership or selling it at reduced prices.
A few days after hearing Manson’s turn at the Pullman, Ockham’s Todd was due in Wellington for a meeting with Prime Minister Bill English. Todd, like Manson, is looking to the future, building a capital base for the Ockham Foundation, a charity with an educational bailiwick. He anticipated his spiel to English would go something like: “There’s a reason that we’re building only 7000 houses a year. It’s because the average price, including for apartments, is north of one million dollars. Aucklanders can’t afford that, and you can’t double supply of the wrong thing. The real issue, sir, is that you’ve got to encourage the industry to build the right thing.”
Depending on how things go, Todd might let rip. The housing crisis, he says, is not, as is often reported, about a shortage of land. The government is too ready to fund greenfield infrastructure, captured as they are by those keen to make an easy killing chopping farmland into $800,000 sections — yet there are few incentives for developers building where people democratically decided to live. “As a citizen it pisses me off big time.”
The Unitary Plan, produced after democratic consultation, concluded that 70 per cent of new housing should be built in the existing housing footprint, says Todd, before getting lyrical: “People don’t necessarily want to live in Albany or Kumeu or Flat Bush or Papakura or Drury or Stillwater or Orewa. They want to live in Ellerslie or Browns Bays or Birkenhead or Takapuna or Glenfield or Henderson or New Lynn or Onehunga or Otahuhu or Orakei or St Heliers or Panmure.”
The case study: Ockham has an eight-storey apartment block under construction in Newmarket. To connect to the water supply, it paid $11,000 for each of the 60 units. “So I wrote a cheque to Watercare for $660,000 to connect this thing to the water network that is already here,” Todd says, before pointing to a
picture of a greenfields site: “These guys go and build 60 houses, pay the same fee and Watercare has had to take all their lines all the way up there. They’re subsidising these guys, who are already making heaps of money, and penalising those who are building what people need, where people need it.”
Another thing: some in the industry have been slow to cotton on to the implications of the Unitary Plan, which no longer economically precludes building smaller units, and many of them, for considerably less than a median-price house. Ockham has recently gained consent for a 14-unit block on the site of a former state house in Meadowbank. It paid $1.33 million for the land and will sell each unit for an average price of $670,000. Last year, 10 houses were built in the suburb, selling for an average $2 million each.
“So with just that one site under the new rules,” says Todd, “we’ll double the housing supply next year in Meadowbank at .3 of the current cost of a new house in the area.” Todd reports the neighbours are well pleased. “They don’t want a developer to buy four or five sections and build a hundred units — they want inner-city Sydney or Melbourne suburbs, with three-storey character units in varying scales, shapes and sizes.”
Over in aspirational Melbourne, things, however, look to be shifting in a direction attractive to those with Utopian sensibilities and who want well-designed but affordable $8000-a-square-metre, median-density apartments. Nightingale Housing has five apartment projects under construction — four in Melbourne, the fifth in Fremantle. The not-for-profit came about as a result of architects “sharing their frustrations”, says Dan McKenna, development relationship manager.
Nightingale licenses a model of alternative housing that enables a number of cost-saving measures, including the excising of developers and real estate agents from the equation, but also possibly car parks (“Well, they’re in Melbourne, we’re in LA,” says the university’s Bill McKay), private laundries, and air-conditioning units. “Banks are risk-averse so there are reasons why things are done the way they
Watercare is subsidising these guys, yet penalising those who are building what people need, where people need it.
are done, but we’re trying to disrupt that process,” says McKenna.
The model works like so: an architect applies to license a project (for $600). A board — “we’ve got the state government architect and a number of other heavy hitters” — assesses whether the project is an ethical fit. If it is, architects are given access to Nightingale’s intellectual property, including a list of wannabe purchasers, which in turn saves money on promotional material and display suites.
Nightingale’s supply is significantly less than their demand; 3000 wannabe purchasers/owner-occupiers are standing by. Then there are the investors — projects may have 25. Their profits are capped at 15 per cent a year for the period of the build. “Our feasibility studies are weighted so that we know the bottom line on the spreadsheet.” Once that point is reached, says McKenna, money is shaved off the purchase price for the end users, who may be Aboriginal people, Torres Strait Islanders, people with disabilities, fulltime carers, firefighters, teachers, police officers or ambulance workers — 20 per cent of apartment stock is reserved for
those identified as struggling to mount the property ladder in Australian capital cities.
Involvement in a Nightingale project is not for the faint of heart, or for those low on altruism. “We do an extensive purchaser engagement process,” McKenna says. After the project has a site and architect, funding, and purchasers, future occupants are surveyed about “what they desire or need” in design terms — bees may need to be accommodated on the rooftop, for instance. McKenna and his girlfriend have bought in Brunswick’s Nightingale 1 — five storeys, 20 apartments, ground-floor retail space, rooftop communal garden. “We all get together once a month and go through the site and talk to the builders. They show us what they’ve been doing. If you can make it, you make it, if you can’t, you can’t. You might get some coffee with some people afterwards. It’s not everyone holding hands, but you get to know these people.”
The model discourages the viewing of housing as speculative financial asset by placing a covenant on future sales, ensuring “you’re not just the lucky guy who gets in at the start … and gets this really affordable product and then sells it on the free market in six months’ time”. Vendors may sell, but only for the apartment’s original purchase price plus the price of any capital additions, and any increase in the surrounding suburb’s housing index since purchase. That the robust and well-designed apartments are linked to housing rather than apartment prices is only fair, says McKenna. It’s apples with apples: there’s currently an oversupply of poorly built apartment stock on the market in Melbourne. Nightingale Housing has fielded half a dozen inquiries from New Zealand architects to date.
Back home, one of the architects of Clarke and Quigan’s soon-to-be bolthole, Pip Cheshire, is disavowing his profession’s reach. “You can argue the design issue, get efficiencies of space, and work around code constraints. It’s trivial, when we need 100,000 dry, healthy houses with good fresh air — like the state houses built by the first Labour government were. They were acts of nation-building, not the results of market machinations. We need a shitload of good houses because they’ll resolve health issues and go a long way to stop domestic violence. How are you going to do that? You’ve got to use the public purse.”
Postscript: The peripatetic Clarke and Quigan are looking after seven-year-old Archie the west highland terrier in Freemans Bay for the next week, and are open to offers thereafter.
We need 100,000 dry, healthy houses like those built by the first Labour government. They were acts of nation-building.
BELOW— The 14 apartments Ockham plans for a Meadowbank site once occupied by a single state house will sell for an average price of $670,000.
ABOVE— Nightingale Housing projects in Australia have robust rules that prevent the dwellings being treated as speculative assets.
ABOVE— This Ted Manson Foundation project in Liverpool St in the CBD will include socialhousing apartments.
ABOVE— Apartments such as those in this Architectus-designed project at Wynyard Quarter are proving popular with baby boomers.
LEFT— Medium-density projects often increase the supply of affordable housing.
ABOVE— Inner-city apartment living is an attractive option for people wanting to be within walking distance of CBD theatres and restaurants.