Warning: Steer clear of inner-city apartments

By:

Australia’s cities as we know them are radically changing.

ApartmentsDue to the ease and popularity of working from home, living in a city centre is slowly losing status.

Of course, inner-city apartment living was a rising trend before Covid- 19 hit us.

In fact for many apartments living in the inner-city sounded perfect, particularly for those who valued location over space.

However, one of the significant impacts of Covid 19 has been the move of urban apartment dwellers to the middle or outer ring areas where they can buy or rent relatively cheaply.

This has led to significant vacancies in our capital city high-rise towers and a significant decrease in demand by both owner-occupiers and tenants and this is unlikely to change any time soon.

apartment-idea-develop-build-city-move-plan-city-building-inspect-urbanOf course, things should improve when our international borders reopen.

But it’s not just COVID city lockdowns that have resulted in CBD apartments’ drop in both popularity and value – although the global pandemic certainly hasn’t helped this issue.

The larger issue is that many of the high-rise towers constructed in the past 15 years were built with little thought as to quality structure, many had poor floor plans and a large percentage were designed with overseas investors in mind.

Where to next for apartments?

That’s an interesting question because not all apartments are the same.

Some will make great investments increasing in value substantially over the long term, but 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 Lego Land 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.

The sad reality for these investors 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 with apartment owners concerned about what unknown issues and liabilities may lie ahead for them and potential purchasers are holding back not wanting to buy themselves futures problems.

Inner-city apartments built in the last decade or two may be difficult to on-sell, even though overall apartment demand from both younger and older generations is set to increase.

It’s unlikely that investors will be keen to buy them as established apartments don’t carry the same tax benefits that attract many investors to new CBD dwellings.

Fact is, while Australia is currently enjoying a property boom, houses rather than apartments, are enjoying strong demand.

35519396_sIn fact, Australian housing values have skyrocketed upwards at their highest annual pace since June 1989, soaring by 20.3% in the past year alone,

This trend, along with lagging apartment values, has been unmistakable throughout COVID.

Meanwhile, there has been a massive deterioration of rent values in inner-city apartment markets since March 2020.

According to a CoreLogic median asking rents dropped by 14.5% in Sydney and fell even further in heavily locked down Melbourne, which experienced a fall of 18.9% in the first half of this year

But what about now that the price of many CBD apartments has fallen?

I can understand why currently some investors and first home buyers are wondering.

Buy ApartmentIt’s a Catch-22 outcome.

The gap between the price of inner-city apartments and houses is only widening – so does this mean apartments are now a viable investment alternative?

I know many first-home buyers and investors are certainly wondering whether it’s time to get into the apartment market despite or because of the falling values.

In almost all instances the simple answer is no.

I would warn prospective buyers to steer clear because while many inner-city apartments might initially appear good value, their older low-rise cousins in the inner and middle-ring suburbs boast far better long-term value.

Remember price is what you pay, and value is what you get.

The prospect of future capital growth and rental growth in CBD apartments is poor, while family-friendly apartments in our inner and middle-ring suburbs are likely to see a strong resurgence in values.

So, where does this leave prospective apartment investors and buyers?

I recommend you consider family-friendly, low-rise, and good quality apartments in popular lifestyle suburbs, which have continued to perform well despite COVID I don’t like you to continue to do so.

These apartments will give you the strong capital growth you will need to climb up the property ladder.

ALSO READ: Housing affordability pressures create pain for apartment upgraders

icon-podcast-large

Subscribe & don’t miss a single episode of Michael Yardney’s podcast

Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.

Need help listening to Michael Yardney’s podcast from your phone or tablet?

We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.

icon-email-large

Prefer to subscribe via email?

Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.


About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au


'Warning: Steer clear of inner-city apartments' have 7 comments

    Avatar for Michael Yardney

    November 25, 2021 Mike

    What are your thoughts on low-rise apartments part of bigger blocks similar to Kimberley Estate in Rosebery and Sydney Park Village in Erskineville in Sydney? They were built in the 90s so quality is better than recent developments but i am not certain if they hold value and grow in price compared to small boutique apartments?
    Manty thanks

    Reply

      November 25, 2021 Michael Yardney

      Mike – I agree that lowrise apartment that are family friendly and small blocks in great locations will make great investments in Sydney. In particular since there’s an undersupply of apartments in the better suburbs of Sydney. However some apartments and some location Will outperform others and neither of the complex as you’re talking about would be on my investment radar

      Reply

    Avatar for Michael Yardney

    October 25, 2021 Jonathan

    Great advice Michael !

    I was truly shocked to see the Lord Mayor last week encouraging first home buyers to buy an inner city apartment while they were cheap.

    Just goes to show, as you’ve often said, beware of who’s giving you advice, as their agenda might not match yours.

    Reply

    Avatar for Michael Yardney

    October 25, 2021 Jules

    Hi Michael- love your work and this article! Out of curiosity, what do you think of first home buyers/investors buying an apartment in Melbourne’s inner East/South-East suburbs? Eg- Hawthorn, Camberwell, Balwyn, etc

    Reply

      October 25, 2021 Michael Yardney

      That’s such a vague question I’d only steer you astray with an answer – the needs of a first homebuyer – you’re very different to the needs of an investor, and while you’re at many apartments in Melbourne’s inner and south-east, and you mentioned a few good locations, are you talking about new apartments, some of those high-rise blocks, or established family friendly apartments. They’re such a wide range. And then of course you’ve not specified a budget. Too many unknowns – sorry. That’s the problem when people talk about the right areas – what maybe a good investment for me won’t be a good investment for you. It’s just as much about the investor – homebuyer as it is about the property

      Reply

        Avatar for Michael Yardney

        October 25, 2021 Jules

        Thanks Michael- to clarify, what do you think of somebody buying their first apartment (approx budget $450-500K) in those suburbs, looking to live in and then eventually rent out?

        Would a new apartment in those suburbs be a better or worse investment than an already established apartment?

        Reply

          October 25, 2021 Michael Yardney

          Jules – I don’t know your personal circumstances but in general I would avoid new apartments

          Reply


Would you like to share your thoughts?

Your email address will not be published.
CAPTCHA Image

*


Copyright © Michael Yardney’s Property Investment Update Important Information
Content Marketing by GridConcepts