There's been a lot of media coverage on this part of Auckland, including a series of articles in the New Zealand Herald written by Anne Gibson - check those for more info. Anyway, a lot of apartment owners have complained that the value of their apartment has gone down.
The drop in value isn't surprising - in fact it's exactly what you'd expect - and here's why.
When Ngati Whatua O Orakei came into possession of this land in 1996, they enacted a "rent holiday" over most of it for fifteen years. They allowed developers to come along and build on the land, resulting in the various developments that we've got today. Buildings were built and occupied - apartments, offices, shops. For the most part, the occupiers didn't pay any "ground rent" to the landowner; they just paid for what they were getting in the building (in theory, at least).
Apartment renters like me paid rent to the apartment owners, and the owners were able to keep this money without having to pay any to the landowner, at least until 2011. The "rent holiday" was a clear financial benefit for the apartment owners.
Think of it like this. You've got a financial liability to pay someone $5,000 a year for 15 years. Taking the net present value of that at 8%, this is equivalent to a debt of $46,221 that you have to pay now.
OK, so say that was your ground rent over 15 years. When you buy a leasehold apartment, you have to figure out how much you'll pay in ground rent over time, and adjust the price you pay as a result.
Now say you get a rent holiday instead. You're essentially $46,221 better off. And if you bought an apartment back in 1996 - whatever you might have paid for it - you would be happy to pay up to an extra $46,221 for it as a result.
Of course, the apartments down here weren't built then, so let's say it's 2003 when you bought, and you get a 8-year rent holiday instead. $31,031 is the net present value this time. You could still pay this much more for a leasehold apartment than you would otherwise, because of the rent holiday. Looking at it another way, if you're considering two identical leasehold apartments, except that one of them has an 8-year rent holiday, you should be happy to pay $31,031 more for that one as a result.
Fast forward to 2012. The rent holiday is over. Back when the apartments were first built, the owners could have capitalised their savings into the purchase price, based on what they didn't have to pay. Today, owners will be paying market rent for the land. If I buy an apartment today, I'm going to expect to pay $31,031 less than the guy who bought it in 2003 (all else remaining equal), because he got eight years rent-free and I'll be paying from day one.
Anyway, so I made this graph below as an example (and because I wanted a picture of an eagle). There's an Excel file which goes with this, which I'll attach when I can figure out how. Essentially, the market value of my apartment today would be somewhere around $170,000 (except for leaky building issues - that's another story). If the market rent paid by the tenant grows at the rate of inflation, and so does the ground rent, then the real value will be flat from now on - but the nominal value will rise. The apartment would have been worth more in the 90s thanks to that rent holiday, either in nominal terms or (especially) in real terms. And hopefully it's clear why that is the case!
Other reasons why the value might have gone down would include:
ReplyDelete1) Tax changes e.g. the removal of depreciation on property - which is much worse for leasehold places;
2) The "market value" of ground rent would have gone up more than anyone would have expected in the 1990s thanks to land price inflation