Units gain market share

As the Aussie family structure changes, more young buyers are opting for apartments close to the city instead of houses with land further out. Kit Kadlec explores this trend and show how property investors can profit from it

The Australian Dream used to equate to owning a modest suburban house, equipped with a barbecue and garden. Inside was the typical nuclear family.

That's a model of the past, however, as more people are living alone, or with smaller families or no children at all. The Australian Bureau of Statistics projected the number of lone person households to increase by between 57% and 105%, from 1.8 million households in 2001 to between 2.8 million and 3.7 million households in 2026.

It's no longer necessary for these smaller-numbered groups to own a house with land. Instead, many prefer the cheaper priced units and apartments, which also often are closer to the CBD. The affordability is especially a growing factor this year, as that section of the market has become the dominant force in the property market.

A shift favouring apartments specifically has already been seen in the numbers, says Terry Ryder, national property researcher with www.hotspotting.com.au. He says 10 years ago, just 15% of first homebuyers bought an apartment, compared to 85% who bought a house. Now it's 30% who have chosen an apartment.

"In each capital city, people are looking for affordable first homes, opting for apartments more often than an outer suburban house," he says.

While houses are still the dominant force, it's quite a change to see to see the market share of unit purchases double by first homebuyers in such a short time.

"One reason is affordability, but it's also a lifestyle choice for people," says Ryder. "Particularly younger people, from Generation Y, are starting to become a real force in real estate."

This generation is more comfortable in smaller homes, and they value well-located properties close to the CBD and wired for technology much higher than having a big yard for barbecuing and playing backyard cricket.

They prefer a café culture and exciting nightlife to a peaceful house in which to raise a family.

"Those sort of people living a busier lifestyle, they don't want to spend their weekend mowing lawns and tending gardens," says Ryder. "And why do I want a five bedroom expensive brick McMansion when I can get by with a smaller apartment that costs half as much?"

Defying a down market

With the growing market share, units have also shown a stronger capital growth than houses in nearly every capital of the country.

In Sydney, Brisbane and Canberra, units showed positive 12 month growth in median value up to February this year, compared to negative growth for house median values. Only Perth showed a drop in unit values over that 12 month period, down 8.31%, although house prices also fell there significantly by 6.82%.

It comes down to price, where the median unit is often $100,000 cheaper or more in the capital cities. The difference is slightly less in regional areas. And in 2009, the lower end is the new trend in terms of property demand and capital growth.

That's not to say all apartments are better buys, or that all Australians are moving away from houses. But the numbers paint a powerful picture for investors to consider.

Within the unit market, however, there are some general rules. Not all apartments are prime buying opportunities worth investing in. Many of the same rules apply for units as with houses, but there are some differences as well.

What to buy

Investors should always try to stay within a 2-12 km radius of the city centre, says Monique Wakelin, director of the Wakelin Property Advisory.

"Investors should be looking at combing a pleasant, quiet ambience with close proximity to all sorts of infrastructure and amenities, such as schools, transport and shops," says Wakelin.

Another key is to make sure there is a parking spot included, something that can make a huge difference in demand, especially if the unit is in an area with few street parking opportunities.

"No matter where you buy an apartment, never ever buy it without allocated parking," says Wakelin.

Ryder suggests making sure the unit is wired for technology as a key point.

"Increasingly, the buyers will be from the younger generation, and that is important to them," he says.

A pool and gym might also build up demand for many buyers.

Ryder says investors shouldn't be turned off by smaller apartments. There used to be a phobia about doing so, he says, and some banks even didn't lend to buyers unless the apartment was of a certain size.

"The demographics have changed," says Ryder. "A one bedroom is a really saleable item, and I think it will increasingly be so."

The demand for renters has also shifted to smaller apartments, as more single occupiers are looking for the cheapest option in a competitive field that has pushed rents way up in the past couple years.

What not to buy

There are, however, areas where demand is not so strong. For one, stay away from high-rise apartments, particularly in areas of overdevelopment such as the Gold Coast, the Sydney CBD or the Docklands in Melbourne, say experts.

"We find for investment purposes, high-rise apartments do not work," says Wakelin. "They are very generic, so there's little scarcity value with them."

Ryder agrees, saying investors should not be swayed by the magnificent views from atop beachfront high-rises in the Gold Coast. Investors should remember they won't be living in these properties, and in the long run, they don't show as much capital growth.

"There's a lot of glamour in buying a high rise, but history shows it's generally a poor investment," says Ryder. "Put aside the emotions, and just look at the sums. You're better off not buying something with an ocean view like in Surfer's Paradise."

He also says buying a used apartment is better than buying a brand new one.

"There's a huge price differential with a new product and equivalent second-hand product," says Ryder. "That's simply because the cost of development is so high. The research shows there's commonly a price difference between 30-40% between new and old apartments."

That ultimately means for an investor that it's harder to get capital growth out of a newer product. It might look nicer, but it will cost you in the long run. There's also little scarcity in some areas for new product, such as the Gold Coast, where new apartments have been built without abandon. And once its no longer new, you actually lose that tag and that value.

"I equate it to buying a new car," says Ryder. "It loses value as soon as you drive it out of the showroom."

Ryder also suggests not buying an apartment off the plan. He says it's risky, and often comes with little reward.

"There's a lot of risk in committing to buy something now and paying two years later, whereas the market can go in the wrong direction in that time," says Ryder. "Plus developers tend to build that (expected value growth) into today's prices these days."

Suburbs to buy and suburbs to avoid

Based on some of these above rules and some leading statistics from RP Data on rental yields and capital growth, we examine some of the best and worst suburbs for apartments.

It's common to find major infrastructure such as universities and transport nearby the top performers, pushing a steady demand. Some of the poorer performers include areas with too much supply or too far from CBDs and job centres.

Apartment best buys

1. Carlton, VIC

Population: 12,050

Key drivers: University of Melbourne, transport and restaurants.

Best streets: Lygon Street, Princes Street, Drummond Street

Renown locally for its Little Italy precinct on Lygon Street and its Victorian architecture, Carlton is a short 2 km walk from the Melbourne CBD. But also pushing up demand is its proximity to the University of Melbourne and RMIT University. Many students choose Carlton for its atmosphere and affordability.

While the median unit price is listed at $235,000, there have been some units selling lately for as low as $125,000, says Julia Stella, sales consultant with BP City Real Estate.

There's a tram stopping nearby the fronts of many units, and the mix of top-notch restaurants also makes it a popular place to live. Aside from the students, many immigrants and young CBD workers live in the suburb more permanently.

Stella says some apartments can be sold with existing lease agreements of sometimes up to five years, although many are also free of any tenants. The low value coupled with high rents make this one of the best places for rental yields in Australia now, as well.

2. Albion, QLD

Population: 1,941

Key drivers: Proximity to CBD, transport connections

Best streets: Mawarra Street, Hudson Road

Albion is an inner city suburb, located just 5 km north of the Brisbane CBD. There's a wide range of product, from the low end to top end, but the overall median is one of the more affordable in the area, along with nearby Wooloowin.

Both are recommended by Ryder as some of the best suburbs to buy apartments, due to their low prices and prime locations.

"In Brisbane, Albion is a good place to buy apartments," says Ryder. "It's close to the CBD, connected by rail, and has lots of transport things happening like the Clem Jones Tunnel (see article in this magazine on infrastructure on page __)."

For around $300,000, investors can own an apartment on elevated land that offers views of the city. There are also a number of schools in the area at the primary and secondary level, and plenty of parks and biking paths.

There has also been recent improvements to the suburb such as the refurbishment of the Albion Hotel, and restaurants and cafes on Sandgate Road.

3. Kelvin Grove

Population: 4,246

Key drivers: Proximity to CBD and schools, affordability

Best streets: Lestrange Terrace, Victoria Park Road

Despite its prime location just north of Brisbane's CBD, Kelvin Grove has an "underrated" reputation, says Ryder.

It's currently going an urban redevelopment on its mix of apartments, shops and restaurants. Just 4km from the CBD, many of its streets are more residential in appearance, lined with trees.

One of the largest demand factors is the Queensland University of Technology campus, and the Royal Brisbane Hospital. The suburb also hosts the La Boite Theatre. Many of the students' parents buy units for their children over three or four years, then often sell the investment, local sales agents say.

More apartments have been constructed lately, rising above the shops, cafes and university campus. It will also receive a boost from the Northern Link Tunnel project, which has yet to begin but is slated for 2014 completion.

"It has affordable apartments, good links to the city, and plenty of demand for rental accommodation," says Ryder.

While more expensive than a few Brisbane suburbs, Kelvin Grove also has some of the most to offer, and is still less pricey than neighbouring inner city suburbs of Red Hill and Paddington.

4. Chippendale

Population: 4,066

Key drivers: Proximity to CBD and Sydney University, transport

Best streets: Cleveland Street, Abercrombie Street

As with the aforementioned suburbs, Chippendale also has the core factors of proximity to the CBD and a strong study body rental population. Sydney University itself has just under 50,000 students, plus there are other schools nearby such as the University of Technology and Notre Dame campuses.

Chippendale isn't the only suburb to benefit from this steady demand, but it certainly is one of the larger recipients of it, and one of the more affordable areas to invest and live. Ultimo is a close contender, also drawing in students and has an even cheaper median price for units, at $360,000 to Chippendale's $395,000.

Based as least partly on a growing demand for student housing, Ultimo and Chippendale have both been transformed lately in both reputation and appearance.

"It's an area that's been considered a down market and a problem area in the past, but it's becoming gentrified," says Ryder. "Young professionals are moving in because it's close to the CBD and walking distance to the university."

Central Station and numerous bus routes are also within walking distance, and the area has access down Parramatta Road out to the western suburbs.

5. Woolner, NT

Population: 533

Key drivers: Proximity to CBD, city views

Best streets: Brewery Place, Villaflor Crescent

One of the faster growing suburbs of Darwin, Woolner is popular with young professionals who want to be close to the city. There have been a number of new apartment complexes that have gone up lately, and they've been selling quickly, mainly to investors, says Sarah Berg, a sales agent with Professionals - Darwin.

"There's been a lot of activity in the area lately," she says, noting those less expensive units have sold the fastest.

Berg says some properties higher up in location have views of Darwin and nearby harbour have also been popular. Commuters can head southwest down Tiger Brennan Drive or the Stuart Highway to reach the CBD in minutes.

One of the bigger draws of investors, as with much of Darwin, has been the considerably high rental yields, at 6.20%. With a population growing, expect demand to remain strong for the rentals for some time to come, says Berg.

6. Mawson Lakes, SA

Population: 5,246

Key drivers: University of South Australia campus, affordability

Best streets: Main Street, Goodall Parade

Unlike other larger capital cities, Adelaide lacks in large blocks of apartment units and is dominated by a swath of small houses. But with a strong and growing university population, there's plenty of demand for areas with some of the more affordable units close to the CBD's west border, as well as the recently built Mawson Lakes campus.

Mawson Lakes includes a technology park, schools and a university campuses. It's also got considerably lower values than many of the upmarket suburbs, and just 12 km north of the CBD.

Developer Delfin estimates by 2010 there will be 10,000 residents in up to 4,000 homes, and facilities for 6,000 workers and 7,500 students. Delfin is offering some apartments currently under construction with leases up to 49 years and priced as low as $199,000 and yields of 6.5%.

Ryder recommends the inner west of Adelaide as another hotbed of student demand, where prices are also cheap and the location even better. It also fits his model of picking used apartments, rather than newly built ones.

"It's right on the doorstep of the CBD," he says of the area near Thebarton. "You might be able to find affordable areas in and around there and them out to students."

Where demand is down

1. Surfers Paradise, QLD

Population: 18,501

Like the waves on its famous beaches, the soaring Surfer's Paradise property market demand has come crashing down from its peak.

The actual unit values might still seem reasonable, having fallen just 1.35% in the past quarter, according to RP Data. Rental yields are above 5%. Other figures paint a gloomier picture, however.

Just 49 apartments on the Gold Coast sold in the last quarter out of 1,298 for sale, according to the latest quarterly Midwood Queensland Investment Report. Prominent Surfer's Paradise projects such as the Hilton and Soul sold zero apartments out of more than 100 on the market each.

It's a far cry from a year earlier. RP Data reported Surfer's Paradise had the most unit sales in the country between May 2007 and May 2008, at 1,633.

Part of the greater number of sales then was the result of higher interest rates forcing owners to sell. Now, at least, the remaining owners can hold while the demand is slow and interest rates are lowered. The question for investors is when that demand from buyers will return, and at what level.

"My research shows that a sea change location is a disappointing performer on capital growth," says Ryder. "It gets outperformed by the daggy suburb next door with the second-hand houses."

2. Noosa Heads, QLD

Population: 3,658

It's hard to find the positives in the Noosa Heads unit market nowadays. Just a year ago, the area was being promoted as one of the top performers, but that run seems to have ended abruptly.

Its median value of $607,500 puts it in the price bracket for properties that have been struggling mightily in the area and country as a whole. A gross rental yield of 3.04% leaves little to be desired.

Property developers who spent heavily in the area have now been brought to their knees and into debt by the effects of the global financial crisis. It's a far cry from a couple years ago, when news reports told of the seemingly endless supply of demand for the high end apartments of Noosa.

"In the long term, iconic sea change locations like Byron Bay, Noosa, and the Gold Coast are to be avoided," says Ryder. "There's a lot of glamour and prestige and they are heavily marketed. But if you examine it without the emotion, the research shows they are underperformers in capital growth."

3. Darling Point, NSW

Population: 3,844

 Median unit value Quarterly growth 12 month growth Median rent Gross rental yield Average days on market

In recent months, asking prices on some of the most prestigious Darling Point properties have fallen by the millions in order to be sold. Other owners are waiting for a better situation before considering selling for such a loss.

Don't expect to find too many first homebuyers here, where the median price is the second highest for a unit in Australia, behind only Point Piper, according to RP Data. Unit prices in Point Piper are down even more, falling 44.35% for the past 12 months.

The harbour side suburb does have a optimal location, situated a short drive to the city via car, or perhaps yacht. When the wealthy buyers return, this market should recover due to its tranquil atmosphere with prime views. With rental yields of just 2.85% currently, however, even a bargain price might not be enough to tempt an investor with enough cash behind them.

4. Bicton/Attadale, WA

Population: 6,018

After years of full on price growth, the southwest Perth suburbs of Bicton and Attadale were in line for some correction. In many ways, these suburbs typify the strong in the Perth area recently that seems to just stretch too far.

One of the most telling stats from RP Data for Attadale is the average days on the market for units - about five months. That's the worst rate for any suburb in Australia with median units priced over $600,000, according to RP Data in January.

Numerous parks and reserves, including popular bird watching sites, are among some of the major draws to this area nearby the Swan River. There's also good schools and nearby shopping.

Those that got in this market early are reaping the rewards, with the average annual growth in both suburbs above 12%. Those that jumped on the bandwagon a little too late are now paying the price, however.

5.    Byron Bay, NSW

Population: 5,609

While certainly one of the most popular beachside locations in NSW, Byron Bay has been hit to its own popularity. First homebuyers and investors in 2009 are looking for bargains or lower valued properties that have potential for capital growth.

That's not exactly what Byron Bay has to offer.

"The market this year is all about affordability," says Ryder, who says investors should avoid Byron Bay for now.

Like some of the Gold Coast locations further up the coast, Byron Bay still can pull very good yields due to strong rental demand. That and its beautiful location might still be enough to lure some investors back in eventually.

Apartments outshine houses in most markets

Source: Residex, February 2009

 "The dominant paradigm is that you get more capital growth out of a house with land because of that land content. But I think the gap will narrow because more people are opting for apartments."

"Particularly younger people, the Generation Y, are starting to become a real force in real estate."