Residential property remains the most popular asset choice for investors, especially those who are looking to fund their retirement. Capital gains are what hits the headlines in mainstream media, but for many property investors, buy-andhold is the go-to, with a focus on yields.

In a nutshell, yields are a measure of rental income a property generates against its purchase price. Experts claim properties with high rental yields are best for investors looking to boost their cashflow – ideally, a net yield of above 5% as this shows stability in the rental income.

CoreLogic’s latest data shows the highest gross yields across the country are on the West Coast in the Grey District – Runanga 11.8%, Cobden 10% and Blaketown 9.7%.

Taranaki, Rotorua, Far North, Kaipara, Buller and South Taranaki Districts are not far behind with yields ranging from 8.1% to 7%, compared to paltry yields of 3% in Auckland.

But the highest yielding properties are often found in remote areas, such as the West Coast and other provincial areas, with small populations and economies and a big difference between rents and house prices. This introduces a host of risks to the equation.

CoreLogic chief economist Kelvin Davidson says a simple analysis of yields is not the full story. “While yields are good for making initial investment decisions they are not a true indicator of whether to buy or not.”

Even though net yields might be only 3% in Auckland and up to a gross of nearly 12% on the West Coast, there are other considerations to take into account, such as the quality of the property, type of tenants, rising rents, wider selection of stock and number of rentals.

For example, Runanga has only 358 houses with a median value of $190,850, Cobden has 666 houses with a median value of $210,000 and Blaketown has 348 houses with a median value of $221,500.

Most of these houses are standalone. There is not the spread of house types in the regions, whereas Auckland investors have their pick of apartments, units, terraced housing and stand-alone properties.

“There would be a far smaller pool of tenants in these areas than in Auckland where there are larger numbers of people searching for rentals and they don’t sit empty for long,” says Davidson. “On the West Coast investors might not be collecting rent for 52 weeks a year.”

So while the yields in some areas of the country may look impressive, as with any investment that looks good on paper, there is much higher risk involved.

Rapid Capital Gains

Davidson says rapid rises in capital gains in the regions over the past 12-18 months could be compensating some investors who might have experienced extended vacancy periods, but it is not realistic to rely on these.

“The fact is, yields have come down as rent has been slower to rise than house prices and it has reduced investors’ profitability.”

Prices at the bottom end of the housing market have been soaring faster than rents, resulting in lower yields and reducing the earning potential of properties – making them less attractive for property investors.

REINZs latest rental yield data found over the six months from October last year to March this year, indicative yields dramatically dropped in 51 of the 56 locations monitored compared to those from the six months ended December 2020.

The number of locations with indicative net rental yields of 5% or more dropped from 23 to the end of December 2020, to 14 in the six months to the end of March 2021. Meanwhile, the number of locations with yields under 4% increased from six to 13 over the same period.

Davidson says a number of investors might believe some regions are undervalued. “However it’s not clear, as they are only undervalued if properties are not empty.”

CoreLogic’s research shows threebedroom houses tend to have better yields than four-bedroom properties, while apartments tend to yield more than houses.

Smaller apartments, such as those littering Auckland’s CBD and often referred to as shoeboxes, generally deliver higher yields than houses and require less capital up front as well. The smaller the floor area, the bigger the yield.

These apartments were hit hard by Covid-19 when the renters, who were mainly foreign students, fled back to their own countries. Yields for some dropped as low as 1.5% when tenants couldn’t be found and rents had to reduce to attract them. Buyers were used to 4-6% yields and they are gradually moving back to that level.

Yields on smaller three-bedroom houses tend to be higher than fourbedroom properties and they also tend to carry a lower price tag.

Different Options

For investors wanting more bang for their buck, an option is to look at different types of properties, such as those catering to niche markets.

Niche properties, such as those catering to students with en suite bedrooms and a kitchenette can provide a much higher yield, but this has to be weighed up against potential risks, such as marketability for resale. In Hamilton, properties close to the university and hospital are returning 10% when rented on a room-by-room basis.

Every property comes with risks and benefits, says Davidson.

New property investor Jasmeet Singh came into the market last year and has six properties across the country all positively geared apart from one.

He’s not new to the game, having built his own mortgage advisory business and says a bargain can still be found, but net yields have come down from about 8% last year when he bought his first property. “If investors can find net yields at 5.5-6% they are doing well.”

Singh says he always looks closely at yields when considering buying. “The trouble is rent rises of 3-5% have not kept pace with rising house prices and it’s hit yields hard.”

Creating Yields

Investors are having to now create yields, he says. This can involve adding on extra bedrooms, creating warmer and drier homes, tidying up exteriors and gardens for street appeal and many other improvements.

He finds the best yields are in regions outside Auckland and Wellington. “Both cities are pathetic for investors, although higher yields can be found in odd pockets if investors spend enough time looking. It is not straightforward to find a high yielding property.”

Rotorua-based iFindProperty owner Maree Tassell says property investment is a business and nobody wants to run any business at a loss.

“Yields have dropped a lot and while there might be capital gains it would be silly for investors to rely on them, particularly with the tax changes coming from the Government.”

She has found the same as Singh – many investors are turning to buying properties that need extensive improvements and therefore they can create equity. “It is generally homes owner-occupiers can’t be bothered renovating. By buying and bringing them up to Healthy Homes standards for rentals, investors are creating better yields.”

Tassell says existing houses are better for investment and yield because the median prices in any area are already known and there is no emotion attached because it is mostly a hard-headed business decision.

“Good yields of 5.9% can be found for dual income properties. The best places for yields,” says Tassell, “are Rotorua, Christchurch and Tokoroa. Most of the main cities are below 5% and it is hard to find yields of more than 5% in any of the key centres.”

New Builds

While many investors are now looking at new builds because the Government’s tax changes don’t apply, most don’t stack up because they have lower yields, she says. “The problem is the supply chain. Off-the-plan prices can go up overnight while rents remain flat, plus there are issues with a shortage of materials and labour and consent delays.”

Both Singh and Tassell say the Government’s tax changes are going to hit “mum and dad” investors on fixed incomes. “When the Reserve Bank introduces debt-to-income restrictions, it will be a double whammy as they won’t be able to borrow to increase their property portfolios. Yields will drop as there is only so much rent people can pay,” says Singh. “There will probably be a number of investors leaving the market

He says it might achieve the Government’s aims of dampening the market but it won’t be good for investors as many won’t be able to afford to pay the increase in tax on their properties.

Treasury believes there is little scope for investors to pass the cost of higher tax bills on to tenants because New Zealand has a “moderately uncompetitive” urban land market.

It says rents are set by a tenant’s ability to pay, so a change in households’ cashflow positions is likely to be the biggest booster of rents, rather than changes in interest rates and taxes.

The tax changes, says Treasury will lower house prices, rather than boost rents, in cities where land markets are constrained and uncompetitive. In parts of New Zealand where land markets are less constrained and more competitive, then there is more scope for rents to rise over time. Rents are also more likely to rise in locations such as near universities.

Davidson says investors, while looking at the existing yield of a property, should be factoring into the final buying decision what future yields will be in the context of mortgage rates, costs and times the house could be vacant.

“It is the performance of the property on a day-today basis that is the key to yield.”