Apartments may be the way most capital city dwellers live in the future, and state governments have stepped up incentives to woo people, particularly first-home buyers, into the sector.
But among property experts they are viewed as a hazardous investment class, particularly when bought new or off the plan. Of particular concern to valuers and a range of property investment advisers are apartments in new high-density precincts – viewed as liable to show poor returns or be difficult to on-sell. Choosing correctly is crucial.
There are some stand-out examples of when it works well, such as the DeNode apartment development in Sydney’s Surry Hills by developer Haralambis Property. Those who bought one of the 54 apartments off the plan when it was marketed in 2009-10 typically paid about $8500 a square metre. They’re now worth closer to $11,850 a sq m – and the building has only been standing for a little over a year.
Neil Smoli, managing director of Aviate Group, sources new residential developments and recommends them to investor clients. DeNode was one of his picks. He says new apartments offer a lot of benefits. Aside from the appeal of new materials and appliances covered by warranties, they also have low maintenance costs and tax advantages from depreciation.
But he says there are pitfalls.
The level of competition for homes in an area will drive sales prices and rental returns, and this is an issue when you have large infill precincts that experience a surge of new supply.
“As a group we avoid towers altogether,” Smoli says. “The apartments within are effectively competing with each other.”
He also recommends avoiding “areas with high density sites in high density locations with no height restrictions”.
Smoli recommends looking at smaller, boutique developments in undersupplied areas with limits on how much can be built. He says the best areas are inner city suburbs that offer a good lifestyle with gyms and restaurants in abundance.
This “third space” appeals to busy workers who no longer want big homes and yards – they are the areas between work and home that apartment dwellers rely on for recreation.
The central business district fringe is better than the CBD, Smoli says, because inner suburbs typically have limited supply and a better lifestyle.
BBQs and pools
The selection of apartments in a development is important. Flats above a garage entry or next to a lift well are not ideal because of noise. Inclusions like barbecue facilities, pools and gyms might appeal to owner-occupiers but are not ideal for investors, who pay for them when they buy and through strata fees even though tenants rarely use them, Smoli says.
Be sure to pick a developer with a good record of delivering on what was promised in the plan. And steer clear of studios and three-bedroom apartments.
“Studio apartments are only suitable for a narrow tenant profile and have a limited resale market, while the premium for the extra bedroom in three-bedroom apartments doesn’t translate into increased yield and, therefore, makes it arduous for the typical investor to hold over the long term.”
Make it a must have
Most of all, pick something that buyers are likely to get emotional about. “As an investor you want to be exciting to an emotional owner occupier, who must have the property and is more likely to pay a premium for it rather than a sophisticated investor who is going to do it on the facts and figures.”
Greville Pabst, chief executive of Melbourne-based property advisory and valuation firm WBP Property, says he would only consider buying a new apartment in a low-density block of, at most, 20 apartments. He says people who buy apartments off-the-plan in growth precincts like Docklands often run into trouble when it comes time to settle. Properties can be valued at substantially less than original sale prices, and banks may refuse to lend, forcing buyers to come up with more money or forfeit their deposits.
“In some cases where people have paid $11,000 or $12,000 per square metre for an apartment, at valuation or when they want to resell, quite often they’re coming in at $9000 or $10,000 a square metre,” Pabst says.
This is for various reasons. The sale price can be artificially inflated by incentives like stamp duty cuts or grants, and by the capitalisation of future tax benefits from depreciation. They may attract the interest and bidding might of foreign buyers, who can’t buy it at resale due to foreign investment laws. And big developers spend big on marketing new apartments – a luxury the new owner doesn’t enjoy at resale.
“We’re not only seeing it in Docklands but also in the house and land packages in the outer suburbs of Melbourne,” Pabst says. “When you’re buying an investment unit in a group of 100 or 150 other units, you’re not buying any scarcity. What that means is whenever you have to sell one of those, there might be five or 10 exactly like it in the same tower for sale. If you want to sell it it’s a race to the bottom. You have to drop your price to the cheapest of all of them to get a sale.”
Banks can be picky
He says some banks don’t lend on apartments smaller than 50 sq m, and some buyers don’t realise this.
Ben Stewart, director of CBRE’s project marketing team, says by buying into a new apartment you’re getting the newest advances in sustainability and design.
“We see rents increasing all the time. There’s still a shortage of stock [in Sydney] and it doesn’t take long for it to be taken up.”