The Problems with Investing in New Apartments in Australia

There is an undoubted trend towards apartment living in Australia. As people live longer and marry later, and as our cities become more crowded, there is a greater demand for well-located, low-maintenance properties over the traditional suburban home. Apartments have also been a favorite with investors, as they generally achieve a higher rental return than houses. But do these factors actually make new apartments a good investment? The reality it is, many of them don't, because they are either too expensive, the wrong design, or oversupplied. Here are some of the reasons why:

NEW APARTMENTS COST TOO MUCH

The first problem with investing in new apartments is their cost. You'd think that building a complex of apartments instead of a single house would lead to efficiencies. After all, you're building many apartments on the same site, which should lead to economies of scale, and each apartment has some shared walls and ceilings. But you'd be mistaken. The cost of construction per square metre for apartments starts at over $2000 for a 3 level walk-up (houses range from $1300-2000). As the complex gets higher these costs soar, climbing to $2,600 per square metre. Why is this? Building high-rises certainly costs more, as these require more efforts to be structurally stable. But much of it is due to problems in the Australian building industry, due to excessive regulation and heavy unionization, which make Australian construction costs around 30% higher than equivalent countries for apartment projects.

Despite what you might think, the cost of new apartments per square metre is much higher than new houses, which destroys the value proposition for most investors. Source: BMT Depreciation

Throw in infrastructure charges from council, marketing fees of $30,000 or more, as well as the developers profit margin of 20%+, there's not much value left for the buyer. So if you're buying an apartment off the plan in Australia right now, particularly a medium or high-rise one, you're likely to be paying too much.

NEW APARTMENTS ARE THE WRONG DESIGN 

One of the biggest supposed markets for apartments is the 'downsizers'  - older couples who no longer need a large home and want to move into something more compact, frequently in the locations they currently live. However, this is not occurring at the predicted rate, because the properties they want aren't being built. Downsizers want space and quality design in a small, conveniently-located complex, but these projects are simply not being built in the right areas in sufficient quantities.  

Current apartment projects are too small in internal space and too high in density. The average size of an apartment in Australia is between 75-85 sqm, which is too small for most downsizers, who are used to living in twice as much space.  If they want to buy a larger apartment, the price premium is ridiculous; in inner Melbourne, for example, the median price of 3 bedroom apartments ($955,000) is 62% higher than that of a 2 bedder ($590,000). This also prices out many families who might be attracted to apartment living. It's ultimately due to a lack of supply of the right stock. There are simply too many small 1 and 2 bedroom apartments being built, and not enough of the type that the market genuinely wants. Until this balance is rectified, new apartments are not going to have the demand for them that they should.

THERE ARE TOO MANY NEW APARTMENTS BEING BUILT IN THE WRONG LOCATIONS

Another major problem with new apartments is the restrictions placed on their construction by town planning measures. Most cities in Australia will restrict medium and high-density developments to certain areas, often around shopping centres or transport nodes, while other parts of the city will be much harder to develop in. Unsurprisingly, developers choose to build apartments where it is easiest to, and so most new apartment projects are in specific areas. Inevitably, this leads to oversupply, as these locations have most of the new apartment supply, as well as reducing desirability due to the increased density! Examples of areas include Parramatta and Mascot in Sydney, Docklands and Southbank in Melbourne, and West End, Chermside and Mount Gravatt in Brisbane.

New apartment buildings in Melbourne. Zoning restrictions have created pockets of high-density, which oversupplies one area without providing the housing mix needed elsewhere. 

As a result, there's a good chance the new apartment you're buying is in one of the areas of oversupply. This will lead to falling or stagnating prices and rents.

INVESTING IN APARTMENTS - BE CAUTIOUS

So despite favourable trends over the long-term, these three factors are combining to reduce the value of an apartment as an investment. Can you still successfully invest in apartments? Absolutely, but you need to fully understand the marketplace you're in, and how you're going to make money out of it into the future. Because as many investors are currently finding out, it won't just happen automatically after splashing out for an expensive apartment off-the plan.

Help build an investment strategy that maximises your return on investment and reduces your risk. Book in a free consultation with Andrew today.