Are apartment a worthy investment?

With the Melbourne property market being widely reported in the media as hot, it is wise to look a little more closely.

While the sale of houses has seen good growth since the start of the year at around 8.9% growth, the same can’t be said for apartments coming in at almost half 4.7%.  So why is this and should you invest in an apartment?

There are several reasons for the slower growth in apartments.

1. Less investors in the market because of the lower levels of rental demand due to lack of international students and less renter movement.
2. Less overseas buyer demand.
3. Lower interest rates are giving buyers the freedom to consider borrowing more and entertaining the idea of a house purchase rather than apartment.
4. Years of oversupply due to large apartment complex developments across Melbourne.

These factors should be a warning to all apartment buyers to ensure they are diligent about the selection of the asset they intend to purchase.  The quality assets are more likely to buck the slower growth trend for apartments and can still be a worthy long-term investment.

So, what does make a good quality apartment purchase for either a home or investment property?

1. Location is the key to any successful property purchase. With apartments, the location needs to be attractive to renters meaning a quiet side street, close to amenities such as public transport, shops, schools, major road links. A street that has majority houses is ideal.
2. Style of architecture. The fundamentals of any good investment are low supply and high demand and as such, buying into an architectural style that is not prevalent and not being replicated is ideal. Art Deco, well maintained 50’s, 60’s and 70’s blocks of apartments will give you the scarcity required.
3. High land value component within the purchase. Most people mistakenly believe that if you buy an apartment, you are not buying any land.  This is not the case. If you stick to older style developments, they typically are on larger blocks and have fewer apartments in the complex.  This will give you a larger ‘notional land value component’ within your purchase price eg a block of 12, two bedroom apartments on a 1200 sqm block of land is essentially allowing for 100 sqm of notional land value for each apartment.  Newer builds tend to be the exact opposite of this and therefore, will underperform as land is the main driver of capital growth.  And remember, it’s not the size of the land but the value.
4. Location within the complex. Not all apartments are equal even in the most beautiful blocks in Melbourne.  Prime position tends to be front or rear of the block and in an elevated, private, secure position with abundant natural light.

If you can achieve all these criteria when selecting your asset, you have selected well and can feel comfort that your property has all the right factors in place to allow for prime capital growth.

Having said that, the apartment market has been flat for several years.  Savvy investors have been caught out having purchased what on paper is a great asset only to find the growth has been mediocre.

In my opinion, the stagnant apartment market growth will turn around with time.  When we see a return of overseas students, we will see a return of investors in the market.  We will also have homebuyers priced out of the house market scaling back their expectations and considering an apartment purchase instead.

This coupled with record low interest rates and a market that is proving tough for house buyers, should mean that investors and homebuyers flood into the apartment market boosting competition and therefore prices.

So, my advice to apartment owners who selected well at the time of buying – sit tight, demand will increase and so will your growth.  If you are not confident that your asset is quality, then I would recommend sitting tight for now, but having your property ready to sell when there is more demand, and the market is stronger.

My advice to buyers in the market now, consider a top-quality apartment now as prices are relatively low and there are some excellent opportunities for growth if you are thinking long term.

As Warren Buffet said, “buy when people are selling and sell when people are buying.”

If you wish to buy or sell a property or would like a more thorough market update, contact our team at The Property Bureau on 03 9018 7870 or info@propertybureau.com