Key takeaways
Investors are increasingly shying away from investing in apartments, because of the COVID-19 pandemic and the influx of shoddy high-rise apartment buildings built during the last building boom. My view is that it depends on the location, neighbourhood and size of the apartment.
Australia's apartment market outlook is poor, with many cheaply constructed apartment blocks being sold site unseen to overseas buyers as well as local investors who bought off the plan. These cookie-cutter-style apartment blocks never made good investments, and many investors paid too much to start with.
In today's high mortgage interest rate environment, I would rather own an apartment in a blue-chip suburb than a house in an outer ring location. Apartments deliver better yields than houses meaning they are cheaper for investors to hold on to.
Is it better to invest in a house or an apartment?
These are age-old questions that aren’t easy to answer.
You see, a few things have happened recently that have caused investors increasingly shy away from investing in apartments.
We’ve seen a shift-change to a new working and home life prompted by the COVID-19 pandemic, which came around the same time as a loss of confidence following an influx of shoddy high-rise apartment buildings (built during the last building boom).
It does seem that more investors are now asking:
Are apartments a good investment in the current market?
My view? It depends...
- It depends on the location of the apartment.
- It depends on whether the apartment is family-friendly or in a high-rise LegoLand-style building.
- It depends upon the neighbourhood.
- It depends on the size of the apartment.
- It also depends on a myriad of other factors.
To explain my view further, let's first take a more detailed look at Australia’s apartment market, and the pros and cons of investing in an apartment.
We can also unpack the challenges that Australia’s apartment market faces and provide top tips on how to buy.
Then we can look at the most important question of all:
Are units a good investment?
Australia’s apartment market outlook
A lot of cheaply constructed apartments were built between 2010 and 2018 and sold site unseen to overseas buyers as well as local investors who bought off the plan.
Of course, these cookie-cutter-style apartment blocks never made good investments.
They offered little scarcity and had no owner-occupier appeal having been built with investors in mind, and often overseas investors who didn’t fully understand the needs of the local market.
Worse still, because of the high developer margins and marketing costs, many investors paid too much to start with and have since found that on completion their properties were worth considerably less than their contract price.
Not only that but they’re faced with highly-publicised major structural defects, fire issues and water issues.
We’ve all seen the reports on the Mascot and Opal towers in Sydney’s Olympic Park… and this building is just one of many with structural issues.
However, since then, the Australian government cracked down on selling to overseas buyers, which means developers must build apartments for domestic buyers.
And these domestic buyers demand higher levels of finish and quality.
Note: Today, the cost of building a high-rise apartment complex is at least 40% more than just a few years ago, with the price mostly exacerbated by supply chain issues, increasing labour costs (due to a shortage of labour) and a surge in the cost of materials.
The increased costs makes the construction of new apartments virtually financially unviable.
Any new construction will need to be at significantly higher sale prices, making existing apartments more and more attractive (and cheaper) by comparison.
In addition to rising costs and prices, levels of new apartment approvals and completions are well below average, keeping supply at a minimum.
In the past 10 years, units have accounted for approximately 41.7% of total new housing completions nationally.
However, over the March quarter of 2023, units made up just 37.1% of completions, holding around -27.1% below the decade average.
And the problem is, while this is happening, there is also a significant uptick in demand from domestic renters, overseas arrivals and even demand from buyers amid thin sales supply.
In short… there are just not enough properties in Australia.
So what’s going to happen next?
Despite the surging demand, developers and consumers are exercising a more cautious approach in light of uncertain economic conditions, weaker capital gains, high construction costs, a tight labour market for trades and rising interest rates.
The thing is, units have historically been a relatively affordable entry point for owner-occupier buyers looking for a first home, or investors looking for decent rent yields.
In a low and declining interest rate environment, the apartment boom of the 2010s contributed to persistently low growth in annual rents across the country (averaging about 2% per year), and through the recent pandemic upswing, detached house values ballooned relative to the unit sector.
However, in the face of rising demand and record-low interest rates, the early 2020s have not been marked by the same uplift in unit construction.
Note: At the moment, high interest rates and low consumer sentiment could temper unit demand and price growth. Moving forward, Australia faces a relatively low number of approved projects, which may create a temporary vacuum in new unit supply.
With the cash rate potentially easing in later this year, greater purchasing demand could potentially fuel a stronger price boom in the unit market.
Apartment vs house for investment
When it comes to deciding between investing in an apartment versus a house, there are many pros and cons to take into consideration.
Here’s a rundown of the pros and cons of each.
The pros and cons of buying an apartment
Are apartments good investments?
It’s the question I’ve been asked many times, and while there is no definitive answer, there are a few pros and cons to help you decide if it's appropriate for you and your investment strategy.
After all, while there are several headwinds facing Australia’s apartment market, and a few reasons why you shouldn’t invest in an apartment, it’s not all bad news… there are still some pros for apartments.
Apartment investing pros
- Lower initial cost: The initial cost of buying an apartment is generally significantly lower than a house so it makes it a more affordable option when it comes to an investment or even first home buying.
For example, the latest SQM data for May 2024 shows that the asking price for houses in Sydney, Melbourne and Brisbane sit at $1.93 million, $1.25 million and $1.09 million respectively. In comparison, asking prices for units sit much lower in each city - at $804,603, $605,063 and $610,969, respectively.
- Apartments cost less to run: Less space means less electricity and gas usage, which means cheaper bills.
- Apartments require less maintenance: Apartments have no garden to take care of, and any common areas are maintained by strata management.
- Apartments offer more security: Being built in blocks, apartments offer the security of their neighbours. Often, apartment blocks also have an added level of security in the front building door ahead of your front door.
- Apartment buildings are often in good locations: By their very nature, apartments are generally in good central locations where land is expensive and living is in demand - think city centres, areas close to amenities or the beach.
- Apartments can give a higher rental yield: Again, by their nature, the lower cost of buying an apartment versus current high rental prices means apartments are able to earn a higher rental yield versus some houses, particularly older and unrenovated houses. This is especially the case if the apartment comes with extra facilities such as a swimming pool or a gym.
Apartment investing cons
- Owners have to abide by strata or body corporate rules: Owning an apartment means abiding by the rules imposed by the strata or body corporate which manages the building and its common ground. This could be as strict as imposing rules about pets and limiting or prohibiting renovations.
- Apartments are more costly to run and maintain: Although the cost of owning an apartment might be smaller, the number of fees (thanks to extra costs such as strata fees) is higher, which can be overwhelming for some investors.
- Apartments are smaller: Less space means lower bills but it also means… well… less space.
- Apartments aren’t as private as houses: Shared common areas and front doors might be a great security feature but it also means you sacrifice some privacy.
The pros and cons of buying a house
Much like the apartment market, there are many pros and cons to investing in a house.
House investing pros
- Houses offer more space: The majority of houses offer a bigger footprint and more space on a bigger parcel of land. This includes outdoor space in things like a garden, courtyard or entertainment area.
- Houses increase in value more: Over the last 4 years, the gap between houses and units has widened to record levels. Historically, houses have commanded higher prices than units, but since the pandemic began, this disparity has grown significantly, with house prices surging by 44.2% compared to pre-pandemic levels, while units have seen a more modest increase of 21.7%. A higher return on value means larger profit and larger savings.
- Houses give more flexibility: Unlike an apartment which is managed by strata, owning a house means you have the freedom and flexibility to do what you want. This applies to anything from owning pets to renovations or even extensions, subject to council approval.
- Houses offer privacy: Without the close proximity of neighbours, house investors and owners have more privacy.
House investing cons
- Higher initial cost: Houses are almost always more expensive than comparable apartments. This means you need a bigger deposit and a larger home loan to buy a house.
- Houses require more maintenance: Owning a house means you’re responsible for all the maintenance, which can be particularly tasking if the house sits on lots of land. There isn’t a strata or corporate body to organise and maintain the gardens, bins or even repairs, the owner has to do this themselves.
- Houses cost more to run: More space and land obviously mean higher utility bills and higher costs in terms of buying extra furnishings and appliances.
Should you buy a house or apartment when rates are high?
Today’s higher mortgage interest rates impact your borrowing capacity. Still, of course, if your budget allows you to buy a house or townhouse in an A-grade location, that’s the first prize when considering an investment purchase. Still, our thriving property markets mean that more and more investors will be unable to afford a house in an investment-grade location.
I’d certainly rather own an apartment on a top street in a blue-chip suburb than a house in an outer ring location much further away from the CBD.
There’s a strong amount of research data confirming that average capital growth rates are higher closer to the CBD and decline the further away from the CBD the property is located.
Note: The fact is, the rich are getting richer and they don’t want to travel further out, and I believe the gap between values in our established inner suburban locations and the outer suburbs will only widen.
In general, apartments deliver better yields than houses meaning they are cheaper for investors to hold on to.
Challenges facing Australia’s apartment market
Assessing the challenges facing Australia's apartment market is vital when doing your due diligence to decide whether an apartment or house is the best investment for you.
Here are three headwinds facing Australia’s apartment market right now:
1. What we want from a home has changed
The legacy of the lockdowns and the work-from-home movement made many Australians reevaluate what exactly they want in the home itself.
All of a sudden people were trying to find space to be able to work, study and also relax all under one roof - and in many cases, this hasn’t gone well.
Prior to COVID-19 more Australians were trading space for place and were embracing apartment living, trading their backyards for balconies and courtyards in inner-city locations.
But now everything is different.
Now we want more space, a bigger yard, and a garage that can be converted into a gym.
The COVID-19 pandemic environment significantly changed homeownership goals and what Australians wanted most in their next home and now flexible and remote working is here to stay.
So it makes sense then that, in many cases, an inner-city apartment in a high-rise tower doesn’t tick all the boxes.
However, family-friendly apartments in medium-density blocks in great neighbourhoods are back in vogue as the high cost of houses continues to create affordability issues.
2. Investors have lost confidence
While well-located suburban medium-density apartments will make great investments and increase in value over the long term, many of the high-rise towers built in the last fifteen years will continue to underperform with poor, if any, capital growth in the foreseeable future.
Of course, these cookie-cutter-style apartment blocks never made good investments.
They offered little scarcity and had no owner-occupier appeal having been built with investors in mind, and often overseas investors who didn’t fully understand the needs of the local market.
Worse still, because of the high developer margins and marketing costs, many investors paid too much to start with and have since found that on completion their properties were worth considerably less than their contract price.
Not only that, but they’re faced with highly-publicised major structural defects, fire issues and water issues.
We’ve all seen the reports on the Mascot and Opal towers in Sydney’s Olympic Park, and the sad reality is that today, in light of the many media reports of structural problems in some of these high-rise towers, there is a crisis of confidence.
This sector of the property market has lost the trust of the buying public and confidence will take quite some time to restore as various stakeholders including state and local governments as well as the construction industry including building surveyors and certifiers scramble to shore up the building sector.
As a result of increasing concerns, a history of relatively high vacancy rates and questionable capital growth in many of these high-rise buildings, investors have lost confidence in these types of apartments (or even in apartments altogether) and are shying away.
But it’s important for investors to remember that not all apartments can be lumped into the same category.
As I’ve already mentioned, inner-city CBD apartments are the ones that are particularly suffering from high vacancies and falling values, while family-friendly larger apartments or low-rise apartments in aspirational and lifestyle suburbs are still in strong demand from owner-occupiers and tenants.
3. The pipeline of new apartments is thin
The pipeline for new apartment complexes is thin thanks to increasing materials costs, a boom of builder bankruptcies, high labour costs and a low supply of available land.
As I mentioned above, the increased cost of building makes the construction of new apartments virtually financially unviable today.
Any new construction will need to be at significantly higher sale prices, making established apartments more and more attractive (and cheaper) by comparison.
In addition to rising costs and prices, there are also below average levels of new apartment approvals and even fewer completions, meaning the supply of new apartments is not going to keep up with demand.
In the past 10 years, units have accounted for approximately 41.7% of total new housing completions nationally.
However, over the March quarter of 2023, units made up just 37.1% of completions, holding around -27.1% below the decade average.
Top tips on how to buy an apartment as an investment
If you’ve decided to go down the apartment investment route, first off ask yourself this:
Which part of the property will go up in value?
The answer of course is the land because the actual property itself will slowly depreciate or lose value.
Tips: It makes sense that whatever your budget, you need to ensure the bulk of the purchase price is made up of as much land as possible.
This may be much easier to work out with a house as opposed to an apartment, but it is still very much applicable because an apartment has an attributable portion of the land attached to it.
Of course, for a house, you can easily quantify the land value by using a nearby comparable land sale, or the council rateable land value.In most cases the same applies to apartments
We take the total land or site value and divide it by the number of apartments in the complex.
Yes, it may be an apartment, but the land/site still has a value that will increase in the right locations.
But remember, not all land is equal.
Consider these two key things to buy the best apartment as an investment:
1. Location, location, location
It’s the old and golden number one rule of property investing, and it applies to apartments too.
I always recommend the inner and middle ring suburbs of our major capital cities where demand is more consistent from owner-occupiers (who push up the values) and from tenants.
However, if you agree that investing in the inner and middle-ring suburbs is where all the action is, you’ll soon realise that houses are not very affordable when we talk about investing in your first or even second investment.
Tips: Compare this to the median for a two-bedroom apartment and this becomes a much more attainable proposition.
And with affordability lucky to remain an issue for some time, it’s likely that well-located large apartments will perform strongly over the next couple of years driven by demand from first-home buyers and investors.
Of course, there will always be more affordable houses around, however, to find them you need to travel further out where price growth is likely to be more subdued over the next few years as those living in blue-collar and first-home buyer suburbs I would like you to be feeling the effects of inflation and rising interest rates more in their hip pockets then the more affluent inner and middle ring suburbs.
2. The type of land is important
When looking at the land component it is important to consider the overall scarcity of available land in the location.
Tips: Think about it – in those expansive green-fill estates on the outskirts of town there is a surplus of developable land freely available and buyer demand is consistently average, meaning shortages are highly unlikely any time soon and therefore capital growth is likely to be unremarkable.
Compare this to land – even a small slice divided up between ten to twelve apartments in a block – in the inner suburbs.
In these neighbourhoods, there are often very tight restrictions on development due to natural constraints, such as the bay and harbour-side suburbs of Melbourne Sydney and Brisbane, as well as the fact that all available land has already been built on.
It is this scarcity – this inability to make more land – coupled with ongoing demand from homebuyers and tenants wanting to live close to desirable and fashionable amenities, as well as employment opportunities afforded by inner-city locations, which underpins and places upward pressure on prices.
Regardless of whether you’re looking to buy a house or apartment, the property investment methodology remains the same in order to make the best investment decision.
Here are four things you should look for to make the best choice:
1) Property price appreciation
It’s important to consider how much the property you plan to buy is likely to appreciate over time.
Ideally, you want a property to appreciate at a higher rate than the rate of inflation.
2) The age of the property
Generally, established properties appreciate in value faster than new properties.
In the current market, it is still possible to buy established properties below "intrinsic" value and in fact, we are often finding apartments for up to 20 per cent below replacement cost.
Whereas new properties come at a premium price.
3) The state of the market
The state of the market should be a consideration when it comes to choosing your investment property, but it’s important to remember that there is no right time to buy.
Time in the market is much more important than timing the market.
4) Property value & expenses
The cost of the property plus the cost of maintaining and even renovating the property needs to be taken into account.
You might be able to snag a bargain with an existing property, but if you need to pump a lot of money into it to make it livable then you need to consider the costs involved and whether it’s worth it in the long term in terms of your capital gain.
A client came to us many years ago with a budget of only $350,000; they wanted to buy a house as it had more land.
The proposal they were looking at was a new house and land package about 25-30km from Brisbane.
The Rateable land value was $75,000; this represented a Land to Asset Ratio of around 21.4%.
The other portion would have been represented by build costs, other commissions and fees that developers usually charge.
Alternatively, we were able to show them an apartment only 5km from Brisbane in a small boutique complex of only four.
The Rateable land value for the site here was $1 million, so each apartment had an intrinsic land value of $250,000.
The Land to Asset ratio here is 73.5% and the land value has kept rising.
There is a clear difference in the land value of these two assets, even though the price is the same.
Case study by Metropole Property Strategists
Tips: Regardless, the investment-grade property should be the focus!
In my view, less than 4% of properties currently on the market are “investment grade.”
Of course, there is plenty of investment stock out there, but don’t confuse the two.
There are many properties marketed as investor opportunities, but they aren’t ‘investment grade’ because they don’t have owner-occupier appeal, they lack scarcity and there isn’t any opportunity to add value.
And when you look at all the fingers in the pie, including marketers, developers, advertising, referrers etc., you’ll find the price of most new properties is highly inflated.
There are so many investors sitting on these types of properties who will never see a return on their investment.
On the other hand, what I consider ‘investment grade’ properties appeal to a wide range of affluent owner-occupiers, are in the right location, have street appeal, offer security, have the potential to add value through renovations, and also have a high land-to-asset ratio.
However, not all inner-urban apartments make an ideal, high-growth property investment.
Note: Given that land appreciates in value over time, you need to seek out a block of units that offers a decent portion of the ‘good green stuff’ to make your investment worthwhile.
High-rise developments with hundreds of flats might give the investor a very low land-to-asset ratio.
Additionally, many of these developments are built en masse by companies looking to profit from those intermittent stages in the property cycle that see buyers flood the market.
Hence, a glut of stock appears all at once and unsuspecting, off-the-plan investors end up competing with hundreds of others in the same boat, desperately trying to find tenants and having to potentially drop rents.
Whereas well-positioned, established apartments in low-rise – often referred to as boutique - complexes offer property investors an affordable opportunity to add a good all-rounder to their portfolio.
When it comes to the right combination of desirability and scarcity to provide consistent long-term, above-average capital growth and tenant demand, I believe you can’t go past an inner-city apartment with character and potential.
READ MORE: Is it better to buy a brand-new apartment?
Investing in units vs houses: Here’s my answer
It’s important to remember that all markets and asset classes move in cycles that include periods of growth, contraction/correction and sideways drift (where there is no change in value).
This means that while, in the short run, returns can be inconsistent, it’s well documented that investment returns eventually revert to their long-term averages.
That is, periods of below-average growth tend to be followed by periods of above-average growth and vice versa
While houses outperformed apartments with regard to capital growth over the last decade, for the 10 years prior to that many well-located apartments grew in value as much as houses did.
The fact the houses have displayed strong capital growth rates over the past 10 years due to appreciating land values, interestingly implies that apartments are currently intrinsically undervalued.
Tips: Remember, apartments have an implied land value underneath them.
Of course, the high-rise apartments with 200 in a block have very little land value attached to each apartment – it’s the developer's aim to squeeze as many apartments on the land as possible.
On the other hand, low-density established blocks of 8-10 apartments in great suburban locations have a significant land component attached to each apartment.
Logically, therefore, despite limited price growth recorded over the last decade, if land in a particular suburb and street has increased in value significantly over the last decade (as can be seen from increasing house values) then apartments (which tend to have a 45-55% land value component) must also be worth more.
In fact, intrinsic land values implied by house price growth during the last decade suggest that many apartments may be fundamentally undervalued by as much as a huge 30-40%.
That’s why I believe there is a strong likelihood of significant price growth for well-located apartments in the coming ten years to rectify the current misalignment, making the right type of apartments (family-friendly medium and low-density apartments in lifestyle suburbs – not inner-city high rises) an asset worth holding onto or considering investing in.
So… in my view, buying an established apartment, townhouse or villa unit is the way to go.
I believe most investors will find the best success buying an existing property with ‘character’ and renovating it to add value, resulting in a higher-yielding, tax-efficient investment.
Many people get confused when choosing between a house and an apartment.
The best piece of advice I would give is to get an understanding of what the Land to Asset Ratio is.
On most occasions, the house will come out on top.
However, remember, it is not the size of the land you should consider but the value.
Family-friendly apartments in small boutique complexes offer great alternatives to houses located a long way from things like employment hubs, public transport, schools and entertainment precincts.
Many smaller boutique complexes are on underutilised pieces of land and that will get rarer and more scarce as time goes on.
It may represent an ideal opportunity for a developer who will be looking at the land and thinking about what may be possible.
Otherwise, it will continue to be in higher demand and grow significantly faster in value to boost your wealth.
Tips: When doing your research in the future, dig a little deeper and remember the Land to Asset formula.
