November, 2011

By Michael Yardney is the director of Metropole Property Investment Strategists

For generations, backyards, barbeques and big houses have been the norm for Australian home owners. But what of future generations?

Some demographers suggest we are so in love with the idea of having big spaces to raise a family that it’s impossible for us to change, despite the fact that Australia will likely have to absorb 2.3 million additional households over the next 15 years alone and we’re not sure we’re we are going to put all these people.

Sure the baby boomers and many of their Gen X offspring have found it hard to sacrifice sprawling McMansions in favour of smaller accommodation, but will Gen Y be more inclined to embrace higher density living?

A recent report from the Grattan Institute, indicates a growing preference toward apartment style accommodation in Australia.

The study, aptly entitled The Housing We’d Choose, found that Australians want more apartment-style housing and are moving away from detached housing.

It also found we’re not building enough of the type of accommodation more and more people want.

Not enough apartments to go around

In 1976, detached dwellings (houses) made up 78% of all accommodation, however by 2006 this had dropped marginally to 74%.

While 4% doesn’t sound like a large reduction, it’s interesting to note that many respondents indicated a preference for apartment living, with the issue being a lack of higher density stock compared to the vast number of detached homes on the market.

The report suggests that there are potentially thousands of tenants and home buyers out there who simply cannot find the type of accommodation they are seeking in the places they most want to live.

Author of the report, Jane-Frances Kelly, says there is an ever increasing divide between the style of housing people want and what’s available, and that the construction industry needs to be more aware of our changing needs and place greater emphasis on affordable, higher density options.

No longer the slums

Over the years our perception of townhouse and apartment living has changed.

Where once we saw medium and high-density developments as “slums” intended for lower socio-economic classes, in the last 20 years or so apartment living has become the practical and trendy alternative, in particular sought after by young, upwardly mobile professionals.

“In short, many of the detached houses… are a legacy of a time when Sydney and Melbourne were different cities. Today’s stock reflects attitudes formed and decisions made under different conditions, some of which no longer apply,” says Kelly.

So why aren’t we building more apartments?

Well we are… in some locations.

The growth in apartment popularity has certainly influenced the Melbourne skyline of late, with a saturation of new stock hitting the market and more set to come on line in the next year or two.

In fact, I’m concerned that there will be an oversupply of apartments in the Melbourne CBD that this will create a severe price correction in that market.

Especially as many have been bought by investors. Some who won’t be able to settle their purchase and others who won’t be able to find tenants at a time when we have fewer overseas students coming to Australia.

An oversupply of CBD and new near city apartments is also looming in Brisbane.

But in general, the high cost of land, local council restrictions, the resistance of local communities, high development costs and difficulty obtaining funding is stifling new apartment development in many of our inner and middle ring suburbs.

Then of course there are the infrastructure constraints to consider – namely pubic transport access and the capacity for existing roads and public facilities, such as schools and hospitals, to handle the type of rapid growth in resident numbers that higher density housing would create.

Some lessons for investors

Let’s face it… as our population grows there’s no doubt we will need to embrace the apartment culture.

This should not be a real problem as fortunately our lifestyle preferences are changing, with many Gen Y’s prepared to trade a backyard for a balcony.

It’s no coincidence that over the last few years investors who owned well located apartments have done well as capital growth and rental growth has often outpaced growth in detached housing.

But as always, you can’t just buy any apartment and hope it makes a good investment.

I’d steer clear of generic, off the plan, and in particular, CBD stock. Inherently these lack scarcity and will be more risky in the next few years due to the glut of similar developments coming on line.

Here’s my recommendation: you would do much better buying an established apartment in a highly sought after, near city or bayside location where you’ll find smaller, boutique style apartments that are always in favour with buyers and tenants.

Sure they might need a bit of a facelift, but this is just a chance to add value to what already represents an asset with excellent potential for strong long-term growth.

Michael Yardney is the director of Metropole Property Investment Strategists , a best-selling author and one of Australia’s leading experts in wealth creation through property. He also writes the Property Investment Update blog.

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By Michael Yardney director of Metropole Property Investment Strategists

Recent reports reveal that Australia has overtaken the US as titleholder for “home to the world’s largest houses”. Large McMansions on expansive suburban blocks have long been held as the ideal “Great Australian Dream”, while smaller inner-city apartments copped a pretty bad rap as the cheap and nasty end of the property market.

However times are changing, with many home buyers and tenants forced to reflect on whether their priority is square footage and a big backyard in the burbs or getting into a property without breaking the budget.

Suddenly that one-bedroom apartment seems a lot more appealing.

While many developed countries have embraced the virtues of high-density accommodation clustered around major cities –  think New York, Paris, London and Tokyo –  here in Australia, our culture has been based on backyards, barbecues and wide-open family spaces.

Now though, a demographic shift is occurring, with more single-person households and childless couples choosing to live in and around our big cities where employment and lifestyle factors are big drawcards.
Figures from the Australian Bureau of Statistics indicate that the number of one-person households will surge to between 3 million and 3.6 million by 2031, a dramatic shift when you consider that in 2006 only 1.9 million people lived alone.

This massive increase is due to factors including:

• A forecast jump in the number of DINKS (Double Income No Kids). According to the ABS couple-only households are set to overtake the number of families with offspring in the next two or three years, and it’s expected that DINKS will make up 60% of all couple-only households by 2031.
• A rapidly growing population and continuing housing shortage in some of our major cities.
• Ongoing affordability issues and increasing rental prices forcing many to rethink their size requirements.

Demand for one-bedroom apartments, which sceptics have long considered to be less desirable, is set to soar as many Australians adjust their ideals according to what they can afford. And one of the questions they’ll be asking is: do I really need that extra bedroom?

In the past singles and couples have, by and large, sought out two-bedroom apartments with the perception that they offer larger living spaces and the convenience of extra storage.  However, with median price tags for such real estate heading upwards of $500,000 and rents soaring over $500 per week in many desirable locations, the affordability barrier is encouraging many tenants, investors and home buyers to accept one-bedroom units as a viable alternative.

Recognising this growing trend, developers are jumping on the bandwagon and including more one-bedroom units in their large-scale projects. But be wary –  the price of many of these new apartments is going up as their size is going down.

So do one-bedroom apartments make good, affordable investments? Is there enough ongoing future demand from tenants and owner-occupiers alike to ensure they perform as long-term cash cows?

The simple answer is yes.

Why? Because affordability means more owner-occupies will be pushed into this type of real estate as they sacrifice size for location, thereby increasing demand and placing upward pressure on prices.  These apartments are often located closer to the city and major work nodes as well as universities and hospitals, in areas that generally have efficient transport connections, plenty of retail facilities and social amenity, all key elements high on the list of young buyers.

In addition, tenants seeking rental accommodation in and around desirable lifestyle locations will look for affordable one-bedroom alternatives, meaning investors will have a large tenant pool to help pay the mortgage.

Sure, one-bedroom accommodation caters to a narrow demographic of one- and two-person households, but the reality is this is a mismatch of the demand from this growing demographic and the relatively restricted supply of established one-bedroom apartments that are “investment grade” properties. I have to say that some of my best-performing investments over the last few years have been one-bedroom apartments. They attract a diverse range of tenants, including Gen Ys making the break from mum and dad; young professional couples, middle-aged singles as well as downsizing baby boomers.

A few words of warning:

• Small spaces can either be highly functional or incredibly pokey, meaning the design and layout of your apartment is critical.

• Avoid studio apartments. They are too tiny, the banks don’t like them and they are very hard to sell. Instead go for something that offers at least 50 square metres of indoor space and if you can manage a balcony and plenty of clever storage options, all the better. Off-street parking is a desired bonus, but not necessarily required if close to transport.

• Steer clear of new and off-the-plan developments in our major capital cities. Especially in Melbourne and Brisbane, which both have a looming oversupply.

• Avoid the large generic developments sold off the plan in the centre of major cities.  While these might seem shiny and new, they quickly lose their lustre when people realise they lack character and the timeless appeal that puts property in continuous strong demand.  Usually the majority of buyers in these soulless complexes are investors, while owner-occupiers – the true driving force behind real estate vlaues – tend to stay well away in preference of something more established or in a boutique block.

So next time you’re shopping for an investment remember that it’s not the size of the property that counts, it’s the size of the profit you’ll realise at the end of the day!

Michael Yardney is the director of Metropole Property Investment Strategists , a best-selling author and one of Australia’s leading experts in wealth creation through property. He also writes the Property Investment Update blog.

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