Introduction

If you're investing in property, you want to make sure it generates a solid cash flow.

That's why investors often calculate gross yields when considering a potential investment.

But the cash flow a property can generate changes based on where it is.

This article breaks down where property investors can find the highest gross yields in the NZ property market.

Where the Highest Yields Are

Where are the highest gross yields within New Zealand?

The above map shows which council areas have the highest and lowest returns.

Red council areas have the highest gross yields; the ones in blue have the lowest.

By studying the map, it's clear the main centres have lower gross yields than smaller council areas, which tend to earn higher gross yields.

Top 5 Yielding Areas

Top 5 places where property investors can find the highest gross yields

Property investors tend to achieve the highest gross yields where property prices are cheap, and populations are low.

And the differences are significant.

Buller – the area with the highest yield – earns gross returns over 3x that of the lowest yielding territorial authority – Queenstown-Lakes.

After Buller, the top gross yields were found in Grey District, Wairoa, South Taranaki and Kawerau. Each of these councils has populations under 30,000.

And only Kawerau has an average property value above $300,000.

Bottom 5 Yielding Areas

Bottom 5 places where property investors achieve the lowest gross yields

On the flip side, look at the lowest yielding areas. The key indicator that shows if an area will achieve a low gross yield is the average property value.

Generally, areas where property prices are expensive earn lower gross yields. And that isn’t confined to just the large cities.

For instance, the 2 areas with the lowest gross yields are Queenstown-Lakes District and Thames-Coromandel.

Both areas have populations under 40,000 and yet also have poor gross yields.

After Queenstown-Lakes and Thames Coromandel, you'll find the lowest average gross yields in Auckland, Western Bay of Plenty and Wellington City.

Yields In Small Towns

You’ll find higher gross yields tend to be in smaller towns

When we studied the map, we saw that generally smaller towns achieve higher gross yields. Looking at this chart confirms this initial view.

It’s important to note there is significant variation.

You’re more likely to find high gross yields in small towns, but not all small towns have high gross yields.

Mackenzie District has an average gross yield of 3.13%, which is only 0.01% percentage point higher than Wellington City.

And yet Mackenzie's population is 46.3x smaller than Wellington City.

Finding Good Yields Within A Region

Where in a region do you tend to find higher gross yields?

So far this article has primarily compared gross yields between council areas.

But a territorial authority can be widespread and include multiple towns and suburbs. That’s why property returns can vary enormously within a small council area.

Even in a geographically small area, like Wellington City Council, there will be high and low yielding suburbs.

Here's a Wellington map, showing the highest and lowest yielding suburbs within the region.

What are the trends?

Generally, properties located in the CBD generate the highest rent levels, compared to a property’s value.

As properties move away from the inner city, yields fall sharply. They then gradually increase again as properties move further out of town.

This trend is also seen in the Auckland property market, Christchurch property market and Hamilton property market.

But why does this trend happen?

Properties in the centre of a city tend to be cheaper. Inner-city dwellings tend to be more compact, and you’ll find a higher proportion of apartments or townhouses.

Even though these properties are smaller, they attract a good amount of rent since they are close to inner-city amenities and employment hubs.

Suburbs on the CBD’s perimeter tend to be more expensive. The properties there tend to be bigger and aren’t accessible to the average renter.

Most people who have the money to live in these suburbs can afford to buy their own home, so there is less tenant demand, which results in softer prices (rents).

Think Parnell in Auckland, Fendalton in Christchurch, or River Road in Hamilton. These properties are expensive and attract a lower yield relative to their value.

As properties move further out of town, yields pick up. Prices of properties fall and become more affordable, yet the rent doesn't fall to the same degree.

The key message here is that once you've found an area you want to invest in, you’ll then need to investigate yields between suburbs and towns within that area.

How The Numbers Are Crunched

How are these gross yields calculated?

Property investors calculate gross yields by taking the potential rent a property could make in a year and dividing that by the property's current value.

As an example, take a property worth $500,000 that rents for $500 a week.

The potential annual rent on the property – excluding any time where the property is vacant – is $26,000.

That's $500 per week x 52 weeks in the year.

Dividing that rent by the current value gives a gross yield of 5.2%. So, $26, 000 / $500,000 = 5.2%.

The maps and graphs within this article take the average rent from each council area and divides that by the average property value within that same region.

It's important to note that this way of calculating gross yields can be misleading.

That's because the average property value in an area comprises all properties within a region.

On the other hand, the average rent is only made up of rental properties.

That sounds complicated, but the key point to note is that the average property is likely to be different from the average rental property.

That means gross yields in each area are likely to be higher than that stated in the above maps and charts.

For instance, when calculating Auckland’s gross yield, we used an average property value of $1,078,326. We then used the average rent charged – $540 per week.

But in reality, a million-dollar property is unlikely to rent for $540 per week. So the gross yields will be understated across the board.

Does this mean this analysis is useless?

No. The analysis is still fit for purpose, because we can still use it to compare which areas are likely to have higher gross yields than others.

However, you do need to be careful. You don't want to look at the average gross yield from the map and say "wow, the average gross yield in Auckland is only 2.6%." Because in real-life, the gross return will be significantly higher.

Do Gross Yields Matter?

Do gross yields really matter?

Another point to consider is whether gross yields are really the best measure of return at all.

That's because different properties have varied costs associated with them.

For instance, one analysis showed that local council rates tend to be higher in areas with smaller populations.

That means some areas that earn a lot of rent will also face higher costs, which in turn

means that a property's returns in a low-population area may not be as attractive as it may first appear.

Gross yields can be a good indicator, but you need to dig deeper when evaluating investment properties. Specifically, you need to consider the cash flow each individual property will generate after costs are paid.

Where To Invest

So where should I invest?

Property is a direct form of investment. When you buy a property, you're not purchasing the whole area or district.

Instead, you're buying one specific property within the region. And your particular property may earn a higher or lower yield based on many factors.

For instance, although Queenstown-Lakes has the lowest gross yields by this analysis, that doesn't mean all properties in the area are low yielding.

There’s bound to be properties that earn extraordinarily high yields there.

And similarly, not every property in the Buller District – the highest yielding area by this analysis – will generate healthy returns. In fact, there will be some properties in the region that are low yielding and could cost you thousands.

While this article can break down the general trends at a “bird’s-eye” level, you'll need to weigh up each investment opportunity on its own merits.

Ed McKnight

Ed McKnight

Ed McKnight is the host of the Property Academy Podcast – NZ's #1 business podcast. He is an economist, having studied at the University of Auckland and the University of Waikato. He's a frequent writer for Informed Investor Magazine and has contributed to NewsHub, Stuff, OneRoof and Property Investor Magazine.