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05-01-2007

Rental market hits new heights

A whole new generation of property investors looks set to join the country's seasoned landlords in the wake of two industry reports last week, forecasting that a higher percentage of the population would be renting for longer in the next decade.

Predictions that 58 per cent of the population will be renting by 2016 have fuelled the long-held belief that residential rental property is the ideal retirement nest egg, even though the property market is now seen as over-heated.

Auckland, with its high net inflow of immigrants, is likely to be one of the best cities to become a landlord.

'One thing that is particularly clear from the two reports is, as the rate of home ownership drops and as Auckland grows, there will be a lot more renters around and nothing is going to change that,' says Massey University professor in property studies Bob Hargreaves.

Experienced investors are looking to expand their property portfolios and new investors are looking at entering the market, says Ashley Church, chief executive of the Auckland Property Investors Association.

The association's usually steady membership of 1000 is well above its usual numbers, says Church. Investors join the association to educate themselves further about investment through its seminars and meetings.

DTZ, the property consultancy responsible for one of the reports published last week, says the active property investors it interviewed are keen to stay in the market and want to buy more properties.

Ian Mitchell, national manager research and consulting at DTZ, says it is logical. 'These people have done exceptionally well from their investments over the past 10 years.

'For the owner of a $350,000 rental property, which has gone up 50 per cent in the past five years, the value of their equity will have gone up from $35,000 to $175,000, giving them a return of 400 per cent, before tax.'

Looking at a model in which Auckland house prices have gone up by 77 per cent in the past five years, they have had a 670 per cent return on their 10 per cent deposit, excluding interest costs.

With the net inflow of immigrants still strong, particularly in Auckland where most tend to settle, the rental market in greater Auckland should stay strong, he predicts.

'Your ability to ride out the cycle [would be good] provided you have your job and at the moment it is a very strong labour market,' says Mitchell.

This would be a fair buffer to worries about interest rate rises, he adds.

Last week's interest rate rise looks unlikely to have put off prospective and present property investors. They will most likely pass the cost on to tenants and experienced investors often have their mortgages spread across a number of fixed terms. Rising interest rate rises are more likely to affect home owners with floating mortgages, says Church.

But while younger property investors may want some of the action the older generation has scored, they should realise the complexion of the rental market is changing and it should be approached accordingly.

'What we are finding is the type of people who rent have changed and the type of rental property needs to change to reflect that,' says Suzanne Townsend, manager of regulatory policy at the Department of Building and Housing. 'Fifteen years ago, people who rented were saving for their first home or they were students. Now it's families.'

With this in mind, landlords would come under pressure to supply a better rental property than before.

'There is some considerable concern about the product that is provided,' says Church.

New Zealand Property Investors Federation president Martin Evans says rental stock is changing with more savvy landlords including family homes in their property portfolios.

Evans is renting out a beautiful Christchurch property worth more than $1 million, which is returning $1200 a week. The three-storey home, overlooking the city and a park, is 'quite good value'.

'I think more people are buying properties that are homes they would like to live in themselves. They are quite a good investment, and not as much risk when you sell because you can sell as a rental property or as a house,' says Evans.

'People should have a home or two in their portfolio and not be so conscious about improving their yield, but rather having the house maintain its value,' says Evans. 'It is important to have a good tenant and have the place looked after.'

And the demand is there.

'A lot more people are renting quality properties and they can rent it a lot cheaper [than owning it]. Ten years ago it was difficult to rent executive property,' says Evans.

'Now there's more to choose from and they are pleasant with landscaped gardens, sometimes new homes.'

Massey's Hargreaves says: 'Some landlords will probably move upmarket. What that is saying is that there is demand for rental property right across the board.'

Another trend new landlords should be aware of is that tenants will increasingly know their rights and demand them without compunction.

And some will be landlords in their own right.

'As landlords they have all sorts of tax benefits. There are going to be more and more of these young people who can't afford to buy in Ponsonby or Parnell but they might buy in Mt Wellington and get the benefit of capital gains and then they live in an area that suits their lifestyle,' says Mary Taylor, who heads up the management rental property division at Ray White in Epsom, Auckland.

'There are a number of very intelligent people out there who are renting and they've done their sums. They are people who have sold and they are waiting to see what has happened with the market.'

Landlords entering the growing rental market should be aware that they can no longer run their property portfolio in a casual way, coming over on the weekend to fix leaks and broken dishwashers.

International tenants coming into the New Zealand market did not think twice about stopping rent if they felt a problem was not being addressed, says Taylor.

She was meeting new residents from France and Germany who were comfortable with renting long term and had extremely high standards of the homes they would rent. Many rentals are not clean enough, she says.

'You are likely to see people expect the same accoutrements in the property that they would expect in the property they buy, for instance a dishwasher,' says Church.

The major change for property investors in the future is the pressure for longer, and more secure leases, which should benefit landlords and tenants. The most common lease is the periodic lease, a floating lease on which a tenant has to give three weeks notice at any time while the landlord has to give three months.

There is also a fixed-term tenancy, which landlords can offer their favoured tenants. Tenants can sign up for an agreed contracted period of one or two years.

'These are becoming increasingly popular with landlords who want to incentivise tenants and give them more security,' says Church. 'A lot of landlords are recognising that it is a win-win.'

Landlords will have to beware that if they did want to sell quite quickly, they will have to sell the property as a rent and income opportunity, which would appeal to a smaller pool of people and might affect the value.

The Department of Building and Housing has been researching longer-term leases overseas but has concluded that New Zealand is not ready for that yet, said the department's Townsend.

Evans says that the Government would have resistance from landlords, who did not want to be trapped into watertight long leases with difficult tenants.

In the amended Residential Tenancies Act - likely to be introduced later this year or early next year - efforts have been made to clarify the roles of the tenant and landlord in the increasingly popular fixed term.

Tenants and landlords will be encouraged to look at making a formal start and a formal end to the lease, in a similar way to a commercial lease. It will clarify what landlords can do in a case of non-payment of rent.

The Department of Building and Housing will continue to look at making rental leases longer term to encourage the more sophisticated kind of property investor, says Townsend.

NZHERALD

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