Apartments – The Modern-Day Quarter Acre

In most places in the world, apartments are accepted as being completely normal places to live – either as an owner-occupier or renter.

Here in New Zealand we have taken longer to embrace this lifestyle. More importantly, from a funding point of view, the banks still struggle with the concept of apartments as security. Bank credit policies have reflected this lack of appetite for lending against apartments and this has had a marked influence on the values of apartments over the years.

The banks operate as a business and to minimise risk they always consider the worst-case scenario that they may have to sell the property by mortgagee sale. If they are forced to sell a property they want to be able to have the widest audience possible to sell to. With an apartment (especially a smaller one) they see there is a more limited pool of potential purchasers and so they limit the lending against this type of property.

Limiting lending happens mainly when money is harder to get for the banks or there are other restrictions in place – like now. Historically, this approach by the banks has had the flow-on effect of keeping the value/cost of apartments lower than where it would be naturally if the lending polices applied the same to them as they do to stand-alone property. With changes to investment property rules, borrowing for a standard apartment is the same as for a stand-alone property – 65% loan to value. The difference comes when the apartment is used as an owner-occupied dwelling and 80% is the maximum that can be borrowed (as opposed to 90% for stand-alone).

So, given that funding is tougher for apartments why buy one? If the values are lower, then it means that they are cheaper to buy as a first home or owner-occupied property. It also means that rental yields are often higher than their stand-alone counterparts.

The challenge for apartment lovers is the funding part. Every bank has a varying love/hate relationship with this property class at any given point in time, and this can change rapidly. The positive is that we know the apartment market and the lenders attitude toward it very well and fund a great number. If you are thinking about entering the brave new world of apartments or are a seasoned owner who wants to add to the portfolio give us a call.