Sorting the Chalk from the Cheese in Apartments - Unit Oversupply Discussed

There is a fair bit of press around at the moment that Australia is building more apartments than ever, especially in the eastern capitals of Sydney, Melbourne and Brisbane where there is talk of an oversupply in units. Apartments and units have been a popular investment vehicle for many Australians. They generally offer a lower entry price, higher rental yields and cashflow, less maintenance and lower council rates and land tax than houses. However, with record apartment sales and building approvals spurred on by local and foreign investors, not all are being built equally or in the best locations.

One of the biggest drivers for growth in the value of a suburb or property is its appeal to the owner occupied market. Nothing stimulates prices in a property transaction like the emotions of a purchaser looking to ‘nest’. As 70% of property in this country is still owned by owner occupiers understanding where they want to live (and what they want to live in) is the key to a successful long term investment. There is a growing divide between ‘owner occupier grade’ property and basic ‘investor grade’ property and understanding the difference can be the key to a successful investment.

Here are 3 basics to assess:

Location:

The old adage location, location, location holds true for apartments as it does for houses. Most of the new apartment development tends to be concentrated in the CBD areas where height and density restrictions are more relaxed. These are the areas more at risk of being oversupplied in the latest wave of construction activity. You will find the owner occupier demand stronger towards the inner-city fringe areas 2-10km from the CBD where supply is constricted. In Brisbane for example property in these suburbs have seen better growth over the past 15 years, even though Brisbane has been fairly flat since 2007 and is currently representing good value for money.

Brisbane’s inner-city fringe:

Size:

A lot of developers are trying to deliver units at what is considered an affordable price point by reducing size and cutting other corners. What results is apartments that present as cramped shoeboxes, dark, not functional and uncomfortable. The average 2 bed unit in Melbourne is now a tiny 65sqm and 45sqm for 1 bed. Steer away from buying a studio, it may be tempting as an affordable entry into markets like Sydney but lenders generally require a 30% deposit on these types of dwellings which will cut the demand and therefore the growth potential when you go to sell or revalue. Also, how much can a studio really go up in value with one, maybe two occupants, at a squeeze?

Features:

The finishes and dwelling type should be matched for the suburb. What is the demographic of the area and what do they desire? An architecturally designed, iconic, boutique building will have more longevity and growth than buildings designed specially to achieve the highest amount of apartment density possible. Look for features such as interesting facades, higher ceilings, larger furnishable balconies and outdoor areas, air conditioning units that don’t take up the whole space on the balcony and units with one car space at a minimum.

An example of an ‘owner occupier’ focused 2 + 3 bed design by a Brisbane developer:

With the increased development of sub-par apartments it is now more than ever important to be diligent in apartment selection for investment. Remember, it is always much harder to sell property than to buy it, meaning that if your property doesn’t have a mass, owner occupier appeal you will find it affecting end values. You must keep this in mind before buying a 45sqm 1 bedroom in a block of 200 units!

Sound Property filter what is on the market or being developed for our clients. We look for owner occupier focused – larger ‘home-style’ boutique apartments to ensure the best long term growth potential. Ultimately, there are reasons for and against almost any dwelling type. The right investment choice for you will depend on your financial position, risk profile and investment strategy.

Written by Andrew Cull, Sound Property Group

To discuss this information with us further please contact a Client Manager at Sound Property on 1300 655 899 or admin@soundproperty.com.au

This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.