As house prices continue to surge higher across the country, investors need to be more pragmatic than ever when it comes to identifying good opportunities.
Around the country, the latest data from CoreLogic suggests house prices on a national basis have increased by more than 20% over the last 12 months. Record low-interest rates have been a contributing factor as the cost to service loans has never been this low. However, tight supply has caused the market to heavily favour sellers for nearly two years since the onset of the coronavirus pandemic, and this has caused further upward pressure on prices. Given the differences in many of the macro-economic factors impacting the various States and Territories around the nation, it is even more important to research the capital city and major regional property markets to look for attractive entry points into these from an investment viewpoint.
To invest effectively, it’s important to look through the lens of an owner-occupier and to see the market from their perspective. For the most part, house price growth and areas that perform most strongly are normally owner-occupier driven.
Identifying these areas and importantly the types of properties that might be suited to the local demographic, can allow us to find good investment opportunities.
A recent report from leading independent global property consultancy Knight Frank, suggests that Australians that are ‘rightsizing’ – downsizing to luxury apartment living – is putting upward pressure on prices in that segment of the market.
In the first half of 2021, there were almost eight times the number of super-prime apartment sales ($10m +) than the 10-year average. This fact is only enhanced by the reality that the pipeline of new apartment stock coming to the market will be down 39% over the next three years as the building logjam post-lockdowns continues. This will be most noticeable in Sydney and Brisbane, with some of the WFM lifestyle markets getting a needed boost to supply as demand outstrips availability.
One of the key components of what a ‘rightsizer’ might be looking for is an apartment residence that is more than just large enough to live in. While many developers focus on small, mass-market 1 and 2-bedroom apartments, most of us would know that this type of dwelling is not really suited to an owner-occupier. Certainly not someone who is likely downgrading from a large family home that they’ve lived in for the best part of their life. Or for that matter, not even a couple who are planning to grow their family and can afford this type of residence.
Interestingly, when we look at “apartments” as a potential investment, many would-be investors are discouraged by the fact that they are so abundant. This is a valid point if one isn’t looking for specific asset attributes. However, certain types of apartment residences do have a lot to offer.
Generally, apartments are normally located in highly desirable inner-middle ring areas of capital cities. They have many great features that are part of the complex and for the most part, they are very low maintenance and safe. Their main problem is the fact they are not scarce, especially in inner CBD locations.
If you turn your attention to something like a large 3-bedroom apartment the equation is very different. A 3-bedroom luxury apartment is one that is large enough to comfortably live in, provide ample entertainment areas and allow owners to leave them unattended when travelling due to enhanced security. Currently, these are as rare as hen’s teeth.
Try finding a 3-bedroom luxury apartment in a sought-after area of Sydney or Brisbane and you’ll quickly find that there is very little on the market. While developers are starting to incorporate more of these into new buildings to meet demand, they still only comprise around 10-20% of new buildings if we disregard “investor stock”. When we see a new 60 apartment development going up, the reality is that less than twelve of those might be larger 3-bedroom plus multi-purpose room style units. It is important to differentiate between these premium apartments and smaller, lower quality ones that are aimed at the investment buyer demographic.
Given the surge in prices of family homes and land in premium locations, these types of properties can represent good value for a certain subset of the market.
Take Brisbane for example where you can purchase a high-end apartment for between $1-1.4 million. In contrast, an older house in a similar location would be double that at approximately $2.2-2.8 million and that’s before you include the costs of maintenance and renovation.
This type of property might also be suited to other types of buyers who aren’t ‘rightsizers’. If you’re a younger couple that wants to live in this type of property you could potentially buy it as an investment initially and benefit from significant non-cash deductions such as depreciation allowances plus all the normal expenses incurred on a cash basis.
Over the past 12-18 months we’ve seen a big push towards freestanding homes around the country. Now that many of those homes are 20-30% higher than what they were, this is going to force that subset of buyers to look further afield or at other dwelling types that might be both suitable and affordable.
For many “rightsizers”, luxury apartments could fulfil their needs and wants, and could also represent an opportunity for investors to benefit from the tailwinds of this ongoing consumer market trend.