As profits in the boom-bust-boom apartment biz get harder to nail, developers are now pitching studios you couldn’t swing a cat in. HAMISH CARNACHAN explores city living with rising real estate star Martin Dunn in the wake of the leaky building scandal and a superheated property market

Surrounded by suit-clad men wearing crew cuts and dark glasses, Martin Dunn’s party could easily pass as a presi-dential security detail. They charge after their superior, trying to keep pace, one falls out of formation whilst responding to a call coming through the wire dangling from his ear. Dunn (pictured, right), just a little on edge, throws the odd curse around and mutters something about things not being in place as his team enter the elevator, and they start the ascent to carry out a last minute inspection of the suite.

It’s all very serious business, you can almost feel the tension, but despite the flamboyance and highly-charged activity, this has nothing to do with the pending arrival of eminence. No, these are real estate agents, not special agents, hard at work moments before this ninth-floor apartment goes under the hammer. 

Situated in central Auckland’s tony Metropolis building, it’s what you’d expect from the impressive façade: the unit is neatly laid out, immaculately furbished in a minimalist style to fit the 48 sq m floor-space, and surprisingly spacious for a couple to live in. Ranch sliders open from both the living area and the bedroom to reveal a vista of Albert Park to the south and a glimpse of the harbour to the east if you can crane your neck far enough over the balcony.

Once inside, Dunn and his entourage from City Sales, the self-proclaimed leaders in Auckland city apartment sales, are all smiles and handshakes as they get down to schmoozing with prospective buyers. Judging by the suits and designer outfits, it’s not hard to pick that this clientele is fairly affluent – Dunn is confident the unit will fetch the asking price, which is set in the “low three hundreds”.

But despite the initial jostling and excitement, $290,000 is as high as the bidding goes. No sale today, Dunn remains unperturbed though. He knows the property climate is right for the unit to be scooped up at its asking price.

As we speak, every crane on the congested skyline is raising another apartment building from the ground. Each dwelling within has practically been sold off the plan, says Dunn, in some cases even before the foundations have been laid. Little wonder a face chiselled with concern not minutes ago can easily crack into a broad smile – according to City Sales, the apartment market is so buoyant demand is far outstripping supply.

The phenomenon, says Dunn, has reached Wellington, Christchurch, and even as far south as Queenstown, but it’s Auckland where the market explosion is really mushrooming.

As of June 2003 there were an estimated 6500-7000 completed apartments in the Auckland CBD and, according to international research company DTZ, that figure will reach 11,000 by the end of 2004. There are currently 157 completed complexes and 47 more are expected to be finished in a little over twelve months time.  

By Auckland City Council estimates, there are at least 45,000 people living in apartments and townhouses today. It is likely that 500,000 Aucklanders will be living in higher density housing by 2050, the majority of which will be in apartments and terraced housing.

Clearly demand is fuelling the apartment explosion - so what’s the attraction that bungalow-dwelling relics are missing out on?

The ‘Statesman’, in the heart of Auckland’s CBD, is a new inner city development offering one and two bedroom suites, views, private balconies, secure parking, elegant decor, a pool, spa, and gym from as little as $147,000. Not bad considering it is also very close to parks, shopping, cafes, and nightlife.

Essentially, apartments like this have provided New Zealanders with an alternative lifestyle that hasn’t been available until relatively recently. Dunn says that has created an unexpected trend. With their children having flown the nest, “more and more” middle-aged couples are selling up their quarter-acre sections and looking for low maintenance habitation – apartments provide the ideal situation.

“We’re finding that empty nesters, as they’re called, can sell the family home and afford a pretty spunky apartment for around $400,000,” says Dunn. “After that, they’re usually left with a good amount to afford a beach or holiday home, or finish paying it off.”

However, one of the most significant drivers of the apartment market at the moment is investment. City Sales’ figures show that vacancy rates are zero and rentals, which are expensive, remain strong. When you look at the numbers it’s not hard to see why. A studio in the city can be picked up for a little over $100,000, and up to $200,000, and rents from $230 to $320 per week.

“Deduct $1,500 to $2,500 for body corporate fees and rates and you can see that a true 7 per cent to 9 per cent net income can be derived from these units as investments,” proposes Dunn.

As the supply increases, it could be argued that such rental levels may not be maintained, but Dunn says that on top of an already steady demand, he expects further interest – which is already apparent.

“It’s coming from frustrated suburbanites struggling with Auckland’s shameful traffic gridlock.

“Another reason for the demand is that immigration has brought in a culture of people who are comfortable living in apartments having come from that background. A lot of our clients are Korean, Taiwanese or from Hong Kong,” he says.

And yet, while this boom seems to fit, hand in glove, the council’s urban development strategy – building up, instead of out, to reduce city sprawl – unexpected problems are starting to surface, which have left some with a bitter taste of high density living.

A young working couple that was shown an apartment in a spanking Mount Eden development thought their dreams had come true when they secured a tenancy agreement on the unit. For them it was an affordable alternative to close quarters living with rowdy flatmates – a place where they could live alone.

Almost immediately after moving in though, the dream turned into a living nightmare.

The couple say they realised it was going to be “cosy”, but after moving their belongings into the unit they barely had room to move. The ‘living area’ was so narrow that the television set could not be accommodated directly opposite the couch. Nothing a wall bracket couldn’t fix, but when the upstairs shower started to drain directly into the living room below, because the plumber decided it would be cheaper than fitting a pipe to the drain-hole, they realised things were not looking too good.

After battling with doors that wouldn’t close, draughty windows and crumbling plaster, the tenancy was terminated and it was back to a sturdy villa. 

This is certainly not a stand-alone-account either. Almost on a weekly basis the newspapers headline another shocking story about a dodgy development.

In recent months, a building consultant’s report into a 153-unit complex near Botany Downs concluded that some homes would not be worth saving owing to rot damage and illegal construction.

The Herald reported that at the Grange, in Albany, 105 owners have been warned by a building consultant and a legal opinion that their homes will not survive without major repairs.

At the 65-unit Vista Rosa complex in Mount Albert two rotting walls have been replaced and the toxic mould stachybotris has been discovered and nearby, the man behind the 26-unit West End, in Herne Bay, faces a $1 million lawsuit from residents who say their apartments will cost $40,000 each to fix. 

The problems aren’t just structural either. As more Aucklanders are squeezed into smaller spaces, it seems the potential for conflict escalates.

A report funded by the Auckland Regional Council and other local bodies was released after it became apparent that many multi-unit property investors and owners were having trouble dealing with their body corporate managers – individuals or organisations that are supposed to deal with issues common to their apartments or high density housing blocks.

The paper made a series of recommendations concerning the need for a careful management strategy in intensive housing developments – a feature that has, until recently, been lacking and causing a great deal of anxiety among owners.

And still, despite a brief snapshot of the ongoing problems that are a recurrent feature in our news, the figures clearly show that the predicament of these unlucky buyers has done little to deter others investing in apartments. 

One feature of the market that has not been presented before is differentiation. As the city apartment market continues to mature, buyers are beginning to distinguish between different buildings, or what the industry now refers to as ‘precincts’. Associated, says Dunn, “is the awareness of the culture of a building and a pricing effect because of this.”

“Buyers need to appreciate the culture of the apartment is going to influence the culture of the building,” he says. “A building comprised of smaller units is going to attract students, because it’s affordable, or the Asian market, because by that clientele’s standards they probably appear pretty large.

“I can show you entire buildings that have become Asian...the cooking smells in the hallway doesn’t bother them, but it may not be appreciated by others.”  

But it is the small size of some of the apartments being built around the inner city that seems to be the latest cause for concern. Apartment salespeople and valuers recall a number of inner city developments accommodating tiny units, some as small 15sq m. Do the math: that’s five by three – about the size of a suburban double bedroom.

A recent Bachelor of Property graduate who visited a number of developments as part of his practical tuition says he was appalled at the living conditions of some families trying to squeeze into “phone-box size” accommodation.

“An Indian family of five was living in this one apartment that wouldn’t have been 20sq m. There was only room for one double bed and that was right next to the toilet – the others slept on the floor,” he recalls.

According to others in the business, such living arrangements are not uncommon and now even apartment salespeople like Dunn and his team at City Sales are starting to voice their concerns at what is becoming a trend.

“With the increasing price of land in the city, one of the drifts is developers making smaller and smaller apartments so that they can reach a profit margin,” says Dunn. “We were asked to manage some that were 15sq m – we declined. I think that’s socially irresponsible.”

Today, at least 70 per cent of the apartments in the city fit into Dunn’s “fairly tight” category. Developers have been able to get away with building these chicken coop-sized units because the current Building Act doesn’t set any standards for the minimum size a dwelling must reach.

According to the chair of the Auckland City development committee, Juliet Yates, that is problematic for a growing city like Auckland “where intensive development is becoming more of the norm”.

“We are concerned about the quality of some the residential buildings currently under development or being proposed.”

Councillor Bill Christian, who sits on the development committee, says the council is also concerned about the health and safety implications of “closet size units”.

“Associated with overcrowding are health issues,” he says. “We’re also worried about people’s safety, for instance, egress in case of a fire or a situation like that.

“I live in a unit in Panmure and mine is 270sq m, it’s a good size. I certainly couldn’t live in some of these developments though. I guess the developers are overcrowding to get more in rent.”

But that rent is obviously cheaper than larger apartments and despite their size, these tiny units are still in demand. Cheap and central, they are very popular among tertiary students living in Auckland. One of the country’s largest earners at the moment is the education sector, with around 70,000 foreign students entering New Zealand each year to study. For most, merely looking for somewhere to sleep and study, anything other than a bed and a desk is surplus to requirements.  

“While it’s good to have this growth and it’s good for the economy there is a very expensive downside and that is coping with the increased demands these places put on the city’s infrastructure, like waste water for example,” says Christian. ““We realise there’s a need for high density housing but somewhere along the line you need to strike a balance.”

As part of that meeting balance, council staff are being instructed to decline building consent applications for small apartments or those where natural light is considered inadequate.

In these circumstances the council will expect the Building Industry Authority (BIA) to step in and decide whether these types of developments meet building code requirements.  

Developers of apartments less than 30sq m or those that have poor levels of natural light will now be advised to go back to the drawing board or seek a determination from the BIA.

The Building Bill 2003 was tabled in Parliament in August. As part of the council’s solid stance on this issue it is preparing a submission recommending minimum standards are set in building legislation to deliver “quality intensive residential living”.

City Sales supports the initiative but Dunn looks at it from a different point of view.

“I don’t agree with the people who say these places are going to degenerate into slums, purely because of the cost factor – the CBD is an expensive area and that’s not going to change,” he says. “For us, it’s just not a healthy environment for people to live in. You get an idea of that when you see the high turnover. It’s hard to keep tenants.”

Something prospective investors should be aware of perhaps, but there is another warning.

“A large proportion of the new apartments being sold at the moment are sold through people who call themselves financial planners or advisors. They are sold through very high-pressure tactics to people who have been persuaded to use the equity in their home to buy investment property.”

Dunn says he is dealing with an increasing number of these clients.

“They come to see if we can help them get out of it because they haven’t investigated the market at all. They’ve been signed up to purchase these apartments with no idea of their relative value. I’ve seen one apartment sold for $280,000 that in my opinion was worth $200,000.

“There’s a real cowboy brigade operating out there that people need to be aware of.”

A 65-year-old widow roped in by these unscrupulous operators signed a purchase agreement that she thought was conditional on finance. Dunn says he was appalled when he discovered a clause in the fine print of the contract that gave the company authority to mortgage her home if the funds could not be raised. 

And just to complicate matters further, there are now five different types of leasehold tenure in the Auckland city - three of these are terminating leases. To date the market has not recognised leasehold land as such when buying so the first ground rent-renewal around the posh Viaduct Basin in 18 months time should make for interesting reaction. So, with these rogue property sharks, phone box-size dwellings, ambiguous lease arrangements, leaky and rotting units, is it all it’s cracked up to be? 

Sure, says Dunn, but because it’s a new market he says people just have to conduct the research so they truly understand what is involved – much like tackling any major investment.When buying an apartment, people need to look out for future developments and Dunn suggests checking adjacent potential sites. He says buyers shouldn’t be afraid of asking questions either. “Ask about tenancies and owner/occupier rates in the building; is there an onsite manager; what facilities are included; check the car parking if that is included and see what security is there and how it works; find out if there are any annual outgoings. If the apartment is in a hotel complex, check thoroughly the lease contract and what chattels, if any, will be included.”

Fortunately, the agent dealing with the property is required to disclose to the buyer any information he or she is in possession of, which you should know about, such as whether or not there are problems with the building’s construction. If they know the building leaks, they have to say. In addition, City Sales advises clients to do their own homework. Copies of the body corporate meeting minutes can be obtained and are often quite enlightening.

Speaking to someone who specialises in the city apartment market is also encouraged - it is a neighbourhood of it’s own and doesn’t behave or react as other markets do. That’s a feature that leads to some common traps for the un-weary.

“Watch out for developers selling their own product,” warns Dunn. “You have limited comeback if you are not buying through a licensed real estate agent. Also beware of display suites - ensure these are built to scale and check thoroughly the dimensions of the unit you are interested in, in comparison.

“Clarify what the floor area quoted encompasses - balconies and outdoor areas are sometimes included – and ask for information regarding the construction company, their track record and any warranties that may be associated with the building.”

And, perhaps above all, seek legal advice before signing contracts.

The ‘high life’ doesn’t always end up turning into a nightmare. There may be a few teething problems that the council overlooked when developing its high-density strategy, but it appears that they are being levelled out. Likewise, changes to building legislation should go some way towards stopping future developments crumbling to the ground.

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