Do apartments still make good investments?
During the last property cycle new and off the plan apartments were popular with many investors.
However, I’ve always maintained that most new and virtually all off-the-plan units are not "investment grade" properties.
That’s because of their cookie-cutter designs, lack of scarcity, poor owner-occupier appeal, and propensity to create oversupply problems, which is exactly what many capital cities have experienced over the last few years.
In fact, many owners of new units have seen their property values drop as well as rents go backward, which have created serious cash flow problems for some.
On the other hand established "family-friendly" units can make great investments, especially older ones, because if they are well located and have a functional floor plan.
Ditto, more of us are trading backyards for balconies and courtyards and want to live in medium-density dwellings.
However, like anything that is getting a bit long in the tooth, some are in need of a facelift or upgrades to improve issues such as wiring and ancient lifts that can prove costly for owners.
So, before you rush out and buy an apartment that might be older than you are, here are some things that you should look out for.
Art deco apartments continue to be very sought-after in our capital cities because of their aesthetic appeal, architectural details, and ornate plasterwork.
Built in the 1920s and 30s, they are also known for being functional, well-built, and close to city centres.
The thing is, many of them are nearly 100 years old now and are starting to show their age compared to modern designs and utilities.
Some art deco apartments can suffer from concrete cancer as well as a lack of power and data infrastructure for our modern-day needs.
Art deco apartments can also have poorly maintained utilities, such as wiring and plumbing, which are expensive and painful to remedy.
Before investing in an art deco apartment, you must:
- Always check its maintenance history.
- Invest in a comprehensive building inspection.
- Assess whether there is any major maintenance mentioned in the owner corporation records, which might require a special levy in the near future.
While the 1920s and 30s were about art deco’s unique style, the following decades were more about form and function.
This means that apartments built in the 1950s and 60s are, well, a bit dull!
While they may be located within small- to medium-density complexes, they generally have no real facilities or balconies.
Apartments from the 1960s suffer from the same lack of imagination, coupled with no air conditioning or lifts.
However, these units can be upgraded internally easily enough as they generally have bigger floor plans than their art deco cousins.
If you’re considering investing in an apartment from this era, you must:
- Review the maintenance history to see what work has been done in the building.
- Look for utility maintenance records to ensure they are up to date.
- Check the sinking fund as well as signs of any past or upcoming special levies.
It wasn’t until the 1970s that the design of units started to become more appealing.
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By that stage, our population had grown significantly, including waves of overseas migrants who were used to living in apartments, so we're seeking those dwellings as their first choice, rather than their second.
So, units suddenly became much larger with better layouts as well as lifts and balconies.
It seems architects finally started designing units that suited Australia’s unique climate.
Rather than copying the way things were in the United Kingdom, which, let’s face it, doesn’t get a lot of sun!
By the 1980s and 1990s, unit designs incorporated more bedrooms and bathrooms as more and more people chose balconies over backyards.
Before investing in a unit from this era, you must:
- Check to see if lifts have been replaced since original construction.
- Double-check that utilities have been upgraded to modern standards.
- Check for any magnesite-related defects or cladding issues.
Many of the high-rise towers built in the last fifteen years will 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.
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 building sector.
These issues will lead to a flight to quality, meaning well constructed, medium density apartments and townhouses will continue to be strongly sought after and will keep increasing in value, making them great investments, while some of the towers built over the last decade will become the slums of the future.
At the same time, in this new Covid environment, fewer people will want to live in large apartment blocks where they share common facilities.
Demand for apartments is set to accelerate from a more diverse buyer profile as apartment living emerges as a preferred lifestyle for many, from the younger generation leaving home to the older generation wanting to downsize
But be careful if you're planning to buy an apartment.
Many of the buildings built during the last construction boom will have a shadow hanging over them for some time.
At the same time reluctance from future purchasers will make it harder for new developments to have sufficient pre-sales to get out of the ground at a time when tighter planning restrictions for apartments, particularly in suburban areas, will exacerbate the emerging undersupply of dwellings required by our growing population.
This will create two tiers of units moving forward.
Solidly built established "family-friendly" medium-density apartments and townhouses developed by reputable builders and on the other hand, the many of the towers that dot our big cities could well become the slums of the future.