Successive buyers have lost more than $200,000 each on a downtown Auckland apartment

Successive buyers have lost more than $200,000 each on a downtown Auckland apartment
The Scene Three apartment complex on Beach Rd in Auckland's CBD.

A two bedroom apartment with two car parks in downtown Auckland has sold at auction for $65,500 compared to its 2006 purchase price of $490,000.

The apartment is in the Scene Three building at 30 Beach Road adjacent to the Britomart precinct. It has a floor area of 80 square metres and comes with two bedrooms, a double (tandem) car park, a study and two balconies (see photos below).

Apartments in the Scene Three complex are considered to be of a high standard and the complex has facilities such as a tennis court and swimming pool for its residents' use, but many of the units have been financial disasters for their owners.

According to QV.co.nz the apartment that sold this week for $65,500 was originally purchased in 2006 for $490,000 and then resold for $280,000 in 2014.

That means the original buyer lost $210,000 on the unit and the second buyer lost $214,500, before allowing for selling costs such as agent's fees and legal expenses.

The unit has a current rating valuation of $740,000.

The dramatic loss in value appears to be due to the fact that the property is on a leasehold title which means the owners must pay ground rent on the unit, which is reviewed every seven years.

The ground rent for the unit that sold was $13,280 a year, on top of an annual complex management fee of $6666 and rates of $1962, taking total outgoings for the unit to $21,908 a year.

The ground rent is currently under review, and with property values in Auckland having skyrocketed over the last seven years, the increase could be substantial.

Interest.co.nz understands that uncertainty over the amount of the ground rent increase was the main reason for the property's dramatic slide in value.

When it was offered for auction at Ray White City Apartments this week the opening bid on the unit was just $1, which the auctioneer accepted, saying "It's not where we start that matters, it's where we finish that's important."

Although there were several experienced investors prepared to take a punt on the property, uncertainty over the size of the ground rent increase and the effect that could have on the unit's cash flow meant they were going to drive a hard bargain and the bidding was in painfully small increments.

After the opening bid of $1 the second bid was $101, followed by another for $201 and then $250. It took 30 bids for bidding to reach $57,500 at which point the auctioneer declared the property to be "on the market"  meaning it had met its reserve and would definitely be sold.

That was followed by another nine bids that took the highest bid to $65,500 at which point bidding stalled and it was sold under the hammer (see photos of the apartment below).

Full results from this and other major auctions from around the country, with details of the properties offered, are available on our Residential Auction Results page.

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30 Comments

at that rate next seller will be paying someone to take off his hands

Beware the perils of leasehold!

TTP

A very cautionary tale on the merits of discounted cash flow analysis

What a mockery that's made of the ratings valuation.

It's more a contingent liability than an asset.

TTP

Isn't the council valuation for the building and the land? In this case it was just the building that was sold, the land is owned by someone else...

If you want to live in it, then its very cheap. $65k up front. $23k per year. Thats a bargain even if you only sell it for $1 in 5 years.,

12
up

Yes, but it won't be $23K a year because the ground rent will be reset at a higher rate and we don't know what that is yet. That why it's so cheap.

In 5 years it might end up costing you $100K to pay someone to take over the liabilities.

Not sure - but isn't this exactly what is expected with leasehold? It should decrease in value to the end of lease when it's worth nothing. The 'loss' is just equivalent of rent payed so over 12 years plus outgoings - not sure what 80sqm and 2 carparks is worth annually?

It sounds bad because it's in a market where most things are freehold. Apparently in Hong Kong everything is leasehold to govt so effectively it's a land tax. This allows for a 'well balanced economy' with other taxes way lower (allowing for investment in the productive economy) - it's also got the highest housing prices in the world by far.

It seems like the leasehold system is broken. If you build something of greater value than the land that you can’t move, of course they will just keep raising the rent.

Use an economic model of profit maximisation. The optimal ground rent is that which result in the value of the asset being $1. That way you have transferred all the value of the asset to you the ground owner. Why would you stop at $2 when you can take another $1?

So obviously there needs to be either regulation for this to work or for term of the rent agreement to cover the expected lifespan of the asset.

Are we sure those apartments are 'high standard'. I'm seeing similar style buildings of a similar age developing leaky building issues.

It's not a leaky building.

It may not officially be at present. But issues can arise over time. Are you confident that it won't have issues?

You could say that about any building, including a house in the suburbs. 

Sorry Greg, you are wrong.
Building age, construction materials and design can provide, at the very least, leaky building warning signs. Whether a building is an apartment, or a house in the suburbs.
I'm not saying it's leaky. All I'm saying is I'd look at that issue if I was buying one of those apartments, or other apartments of a similar vintage and design.

Of course you should do your due diligence when buying any property. No building is exempt from potential problems. Think of the horrors you might find in an old villa. 

Scene One had some issues.
I'd be very cautious.

Think of the land you own underneath it

@Fritz I think you might be mistaken for another apartment block further down the road - That particular block near the old Railway station had issue with water tightness

[Potentially defamatory comment deleted.- Ed.]

'When it was offered for auction at Ray White City Apartments this week the opening bid on the unit was just $1, which the auctioneer accepted, saying "It's not where we start that matters, it's where we finish that's important.'

Funny

What value then for all the other, how many, apartments? I’m from Canterbury. Can someone lead me into the bight as to what’s going on.

164 apartments I believe. 163 owners are not going to be happy.

That, so far, is the understatement of the year.

Incredible. I do feel for the owners, not much experience in NZ of leaseholds back in 2006 (apart from Cornwall Park residents). W

Excuse my ignorance, but is there any downside to the Freeholders of increasing the ground rents and complex management fee (Often the freehold owners also have their fingers in the management company) to untenable levels?

I'm asking do they want to be the freeholders of land hosting hundreds of $60k apartments? Rather then maintaining the value at upper-socio levels? It doesn't effect them if they gradually drive the tenants more 'downmarket'?

Would need to go AirBnB here just to make it work? $23k is respectable amount of principle to pay off each year let alone an ongoing fee.

maybe that's the end game, drive the value down to $1 then landowner takes over the whole building and can rent them out, turn into a hotel even freehold then resell all the apartments at a million each.
with leasehold only the leasehold owner knows what the long term plan is

The Cornwall park trust board have taken [ edit. ] peoples homes by way of the values set

This demonstrates perfectly why you want to be a "Land lord" (and not an owner of depreciating buildings, built on the appreciating land)

Some people knew about leasehold a long time ago. Sixty years ago every time we drove down the end of Remuera Road my dad would comment as he looked around. "Never ever buy leasehold son"