Olly Newland says only invest in residential property if you don't mind low returns and all the hassles, consider commercial property as an alternative

Veteran property investor and commentator Olly Newland believes the Auckland residential property market could have hit a plateau that could last for 10 years.

“I don’t think the bubble has burst. I would say it’s leaking and has become a little bit soft around the edges,” said Newland, who is a director of property management and advisory company Newland Burling & Co.

“The Auckland market is choppy, it’s nowhere near as buoyant as it was a year or two ago,” he said.

“There’s still money to be made and people can still sell their places, but I think we’ve probably reached the pinnacle at the moment.

“I think we’re going into a long flat period which could last for 10 years.”

Provided we don’t suffer some massive unforeseen economic shock like another international financial crisis, he said.

Newland also believes that provincial property markets, which have remained buoyant while the Auckland market has flattened, will eventually follow Auckland’s lead.

“There’s what I call a grunt factor, where prices reach a point where it doesn’t matter how cheap interest rates are, the rental [income] just doesn’t cover it,” he said.

“I think many areas are reaching that grunt factor and people are just going into it for the capital gain.

If that capital gain starts to slow down, where it has here and there, then the people who have been buying will start to think twice about whether they should carry on.”

Oversupply issues to emerge?

Newland believes this poses particular risks for the building trade, with builders likely to have large numbers of projects on the go which they started when demand was high, only to be left high and dry if demand falls away suddenly.

That could lead to an oversupply of apartments and other housing projects, as has happened in parts of Australia.

“This may be a few years down the line, but we have to watch it,” he said.

He also believes residential property investment now only makes sense for investors if they don’t mind low returns.

“If you are happy to invest $1 million or whatever it is and are happy to get, effectively, a 1.5% to 2% return on your money, with all of the hassle of tenants and that sort of thing, then it’s probably as good as any other,” he said.

“At least it’s bricks and mortar and you can see where it is and it’s in your control.

“But as a return on your investment, it’s pretty lousy.”

Small commercial properties now cost less than an average Auckland house

Newland said many of his clients were starting to invest in commercial property because the returns were better and a smaller commercial property now costs less than an average Auckland house.

“We have clients who are buying commercial properties for $200,000 to $250,000 [which are] producing returns of 6-7% net in the hand after all expenses, because the tenant usually pays all the outgoings,” he said.

“There’s no Tenancy Tribunal, no bond limitations, there’s no LVR rules, no bright line test, eviction is much easier, the tenants look after the interior, they are there for years and years usually,” he said.

But he also cautioned that commercial property could be a trap for the unwary.

“You should not just go down the road and buy one, because there’s lots of fish hooks in commercial property and if you are not careful you could take a real bath,” he said.

“You have to understand what you are getting into, whether it’s a $25 million one or a $250,000 one.

“It’s not that difficult if you are prepared to learn about it,” he said.

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