Economist weighs up some key property investment performance metrics
Investors have two primary objectives to weigh up when investing in real estate – yields or capital growth.
Kelvin Davidson (pictured above), CoreLogic NZ chief property economist, defined these two types of investors and tackled the merits and considerations for both.
Davidson said a yield-focused investor prioritises regular income from their property investment with the goal of getting the most rental returns and cash flow. They typically seek properties that offer high rental yields relative to the purchase price in areas with strong rental demand.
In contrast, a capital growth-focused investor looks for properties with the potential for long-term value appreciation, particularly in areas with high-growth potential, such as emerging markets, developing neighbourhoods, or regions experiencing economic growth.
Both types have plenty of merits and considerations.
“Ultimately, choice between yields or capital growth depends on an individual’s investment goals, risk tolerance, financial circumstances, and market conditions,” Davidson said. “It’s also possible to strike a balance between the two strategies, sourcing property that offers a decent rental yield and potential for capital appreciation.”
The CoreLogic economist used the firm’s new Market Trends dataset to analyse some key property investment performance metrics when it comes to yield versus capital growth. For the exercise, he took figures from CoreLogic’s Buyer Classification data, specifically multiple property owners (MPOs) in old Auckland City Council and Manukau, where MPOs – that is investors – accounted for more than 40% of property purchases so far in 2023.
“In Auckland City, a two-bedroom apartment has a current median value of approximately $741,000, down roughly 7% in value over the past year. Despite the decline, values are still 17% higher than five years ago,” Davidson said.
“In Manukau, three-bedroom houses have a current median value of approximately $925,000, down in value about 14% over the past 12 months. Again, despite the downturn, values of three-bedroom houses in Manukau are 23% higher than five years ago.
“For rents, a two-bedroom Auckland City apartment is about $620/week and gross rental yields are 4.4%. Manukau three-bedroom houses rent for $670/week at an estimated gross rental yield of 3.8%.”
He said the example confirmed the theory that apartments return a higher rental yield than houses, even if they don’t deliver as much long-term capital gain.
Davidson used another metric for analysing the two – say, an investor was to resell down the track. Average days on market, or how long a property takes to sell, is an indicator of market demand and competition.
“Auckland City two-bedroom apartments are currently taking an average of 38 days to sell, a week longer than three-bedroom houses in Manukau at 31 days,” he said. “That is even though fewer two-bed apartments have come on the market in Auckland in the past year (1.5% of available stock) compared to three-bedroom houses in Manukau (2% of available stock).”
The age of the property also has an impact, Davidson noted.
“Market Trends data shows existing two-bedroom apartments in Auckland City have a median sale price of about $652,000 compared to an equivalent new build, which has been selling for a median price of $865,000,” he said. “The premium also exists on houses with established three-bedroom homes in Manukau selling for $960,000 compared to the new build sale price of $1.05 million.”
While this is just one comparative analysis, Davidson said there was evidence apartment rental yields outperform that of houses, but the reverse can be said for capital gains – particularly over the medium to long term.
“We’ve also seen evidence of a new-build premium across apartments and houses, and despite preferential treatment from a tax/lending perspective, it costs investors more upfront to purchase them,” he said.
Davidson said he will be using Market Trends extensively over the coming months to get new insights into the market and invites the public to send him a Market Trends insight query to investigate.
Use the comment section below to tell us how you felt about this.
