Chch Investor Meetup, April 9, 2016

We’ve continually have new members and attendees arriving to the group with experience of investment via property as a vehicle. Part of that influx in recent meetups we suspect is due to the over supply of rental properties that is currently affecting Chch, as the peak earthquake repair period has subsided, increasing the offering of rental options to the market.

Here’s a quick snapshot of Trademe’s property listing section today, on April 9th, 2016.

Here’s a snapshot of the stat 2 years ago, in March 2014.

That’s double the number of rental options. The stats gets interesting seeing the reduction of properties available for sale dropping in Auckland and Wellington.

What did it look like in May 2012?

The market sure seemed like a buying opportunity, 15,000 listings in Auckland, 6,200 listings in Canterbury. Look at the listings available for rental, four years ago, there were 875 available listings.

Let’s go back a little further, May 2011.

Now let’s chart it through.

Lots of caveat, the data is not expected to be complete, more of a proxy, partly due to the popularity of TradeMe throughout the years, so this is a quick stat grab to help illustrate a context.

In any case, over the years, you can see that Christchurch supply of homes for sale has increased from post earthquake (doubling after the quake, with some selling as-is-where-is and many now selling after some rehabilitation and repair work).

The rental space however, has seen the squeeze of scarcity and now showing over supply, as new subdivisions have appeared and land conversions have increased density. Such an increase in supply of rental options would eventually lead to sale of such units. Many have already started being placed on the market as the CBD recovery is continuing to take hold.

We went further today in comparing stock investment valuation with property investment valuation, equating price earning ratios as if a particular property was an entire company (like a single company REIT).

What has been some of the property investment opportunities in Christchurch over the past few years? Let’s walk through a few common ones.

1. Buy, furnish and rent out. This model worked out very well in Christchurch over the past few years. The model is perceived to have some issues now that EQC repair works for many homes are completed and many home owners of affected by repair work have either moved back to their home or bought new property. There are still some options in such a play with as-is-where-is houses, which can be acquired affordably and then rented out. For the longer term, buying properties in areas near the universities tended to be a good model, as students start to fill up the classes once again. Another great option is when your property is in a highly sought school zone, such as Burnside, which you can then rent out your property to families who would tend to be tenants for many years. Post earthquake, this was a straight forward model that could yield very well.
2. Buy, fix and then rent out. This was harder to do in the past few years in Chch, though it’s much more common now, with many rental properties having appreciated in value or have generated sufficient rental income that the owners decided to renovate some upgrades. Many take the opportunity of the EQC repair to have further work done. The more ambitious ideas though, may run into consent issues with new additions. This creates some issues when the property is prepared for sale.
3. Buy, fix/renovate and sell. This is the traditional fixer upper model. Chch post-EQ had plenty of properties available at affordable prices. A moderate upgrade of the kitchen and bathrooms, would immediately increase the ROI. For the trades folks, this was a good reliable model as they would have access to both talent, surplus materials and also good network to understanding market demands.
4. Subdivide/Rebuild. There was a mini-boom in Christchurch back in the 90s, where large lots were divided and the back part of the land is converted into another property. In some cases, the existing property is demolished to make way for 2–4 new units of housing, if the space permits. The approach returned again in recent years as modern town houses designs increase the population density on the same piece of land. A more ambitious version of this is when two adjoining lots are merged into supporting 6–8 units. There was a period in the 1970s that this was quite popular, leading towards introductions of flats that were cross leased.
5. Buy new land and build. Doing this in Christchurch has been challenging over the past few years, as there were many builders who went bankrupt in the rebuild boom and the rising cost of labour as the market opportunity for skilled labour got things out of whack. We’re slowly reverting back to the mean now, though there is still quite a bit of reverberation going on.

Which are the models that are most profitable? Like other investments, it really depends on your portfolio strategy, your risk appetite & allocation, amount of capital, amount of time available to learn & manage and luck. At scale, #5 is one that can generate immense returns, though it’ll require an intense amount of management and attention to achieve the high returns.

Though deep inside of many investors, you’d like to have a property that maintains well, rented out to a family that stays on for the next two decades and accepts rental increase every other year.