By Amanda Morrall
Despite rising rents, low interest rates and stable housing values, residential property remains an overall marginal investment as measured by the return on investment.
Data collected by interest.co.nz shows average after-tax operating returns* were (as of May) less than 2%.
Interest.co.nz publisher David Chaston, said while ROI on residential property had risen to its highest level in five years (which is how long the website has been monitoring performance of this asset class) the lift hasn't been enough "to transform this investment from its poor return status.''
Factoring for steady or modest gains on property value and the removal of depreciation as a tax deduction, didn't change the outcome either, said Chaston commenting on the data shown in the following graph.
| Period | May 2011 | May 2010 | Dec 2010 | Dec 2009 | Dec 2005 |
| Rental income | $330.00 | $320.00 | $320.00 | $310.00 | $280.00 |
| Mortgage payment | $269.58 | $272.47 | $276.72 | $282.29 | $277.09 |
| Mortgage interest | $183.55 | $187.56 | $196.78 | $196.79 | $223.29 |
| Rates & Insurance | $27.03 | $23.96 | $25.39 | $24.05 | $19.19 |
| Maintenance | $10.12 | $9.60 | $9.81 | $9.30 | $8.40 |
| Cash flow performance | $23.27 | $13.97 | $8.08 | -$5.64 | -$24.68 |
| Depreciation | $0.00 | $47.88 | $47.16 | $49.04 | $40.52 |
| Operating performance | $109.30 | $51.00 | $40.86 | $30.82 | -$11.40 |
| Income tax | $32.79 | $15.30 | $12.26 | $10.17 | -$3.76 |
| After tax income | $76.51 | $35.70 | $28.60 | $20.65 | -$7.64 |
| Investment | $82,088 | $82,170 | $80,933 | $84,150 | $69,527 |
| ROI (excl gains and losses) | 1.47% | 0.88% | 0.52% | -0.035% | -1.85% |
To be competitive with other asset classes, some investment experts (including financial advisor and bestselling writer Martin Hawes) suggest returns should be at a minumum of 7% after tax with 9% being the "sweet spot." Yet listed property trusts, haven't exactly been hitting that target either.
Over the last five years, AMP Office Trust, Kiwi Income Property Trust and Argosy Property Trust have all been in negative territory, with -4.8%, -4.4% and -5% annual returns. By comparison, the NZX 50 Gross (which represents the prices of New Zealand's biggest companies and dividends) has delivered annual returns of 2.76%.
While some individual properties may have fared relatively better than the national ROI average on residential property, Chaston said the overall landscape suggests this is "not the time for this asset class.''
For residential property investors, the nearest proximity to a happy place is Gisborne, Timaru and Wanganui where improving ROIs are hovering around the 5% mark. Canterbury is also in that zone but the unique circumstances and uncertainty surrounding that market it put it in its own class as an investment.
While rents have been rising in some select areas, most obviously in Auckland, those increases look to be offset by rate hikes and also insurance, which is increasing as much as 50% with some insurers. (See chart below showing local authority rate increases).
Rental revenues fall short of hitting sweet spot
"Rents may be high and rising, but they are still not enough to cover the normal operating costs - even after depreciation expense is no longer provided for.''
Central Otago Lake was an exception said Chaston. He said the removal of depreciation deduction had the effect of pushing ROIs in that region into positive territory in April and May.
Chaston said national returns have also been dragged down by Auckland, Waikato, Bay of Plenty and Nelson/Malborough where returns are in negative territory.For residential property to reinstate itself as the darling of the investment space it was five to seven years ago, either rents (limited by their affordability) will need to rise "significantly" or property prices will need to fall significantly.
Chaston said a potential capital gains tax wouldn't alter the equation much.
"A proposed CGT will have little impact on this sector because such gains seem very unlikely for some considerable time. A proposed land tax would turn poor current returns into negative outcomes quickly without offsetting benefits.''
| Real property investment retuns: | ||||||
| net returns after tax, excluding capital gains | ||||||
|
May-2011
|
Apr-2011
|
May-2010
|
May-2009
|
May-2008
|
May-2007
|
|
| New Zealand |
1.47%
|
0.57%
|
0.88%
|
0.10%
|
-4.14%
|
-5.04%
|
| Northland |
1.15%
|
2.64%
|
-1.63%
|
-2.25%
|
-6.58%
|
-7.04%
|
| Auckland |
-0.74%
|
-1.30%
|
-1.26%
|
-2.10%
|
-6.26%
|
-6.09%
|
| Waikato/BOP |
-0.42%
|
-0.84%
|
-0.22%
|
-1.59%
|
-5.07%
|
-5.44%
|
| Hawkes Bay |
2.70%
|
5.35%
|
2.00%
|
3.37%
|
-2.23%
|
-2.46%
|
| Manawatu/Wanganui |
3.43%
|
3.59%
|
1.85%
|
1.27%
|
-2.47%
|
-2.49%
|
| Taranaki |
3.29%
|
3.85%
|
1.54%
|
0.84%
|
-3.72%
|
-3.52%
|
| Wellington |
1.73%
|
1.59%
|
0.53%
|
0.73%
|
-5.09%
|
-5.94%
|
| Nelson/Marlborough |
0.17%
|
-1.17%
|
0.16%
|
-1.12%
|
-6.24%
|
-6.53%
|
| Canterbury/Westland |
1.87%
|
0.62%
|
0.76%
|
-0.12%
|
-3.80%
|
-4.84%
|
| Central Otago Lakes |
3.71%
|
-2.87%
|
1.11%
|
-1.01%
|
-7.15%
|
-7.14%
|
| Otago |
3.29%
|
3.67%
|
4.11%
|
2.85%
|
-2.35%
|
-3.44%
|
| Southland |
3.83%
|
2.84%
|
4.80%
|
3.77%
|
-3.95%
|
-2.06%
|
--------------
*Assumptions used to calculate ROI: Three bedroom house, lower quartile purchased in good condition and rented as median rent. Mortgage on two-thirds of the purchase price, amortised over 25 years with weekly payments on a variable interest rate. Prior to August 2009, it was a two-year fixed rate. Balance of purchase price funded with savings.
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