When considering investing in property at some stage you will have to make a decision between the different types of real estate on the market – from duplexes and townhouses, semi and fully detached houses to existing and off the plan apartments. Each type of property has merits depending on your investment strategy and your budget. However most professional property investors believe that at the moment apartments, and specifically off the plan developments, can offer the widest range of benefits for those looking to invest in real estate for the first time.
It is helpful to look at two specific types of property – established houses and new apartments – to get an indication of the arguments for and against investing in these types of real estate.
Traditionally houses with large blocks of land in suburban areas were considered a good investment because it was argued that the value of the land was worth more than apartment blocks on small parcels of land. House and land would appreciate more over time, whereas owning an apartment only meant that your asset was worth only a particular percentage of the overall land value.
Professional property investors now believe that buying an off the plan apartment in an inner city suburb, where land may be at a premium, is a better investment option because ultimately your “land-to-asset ratio” will be higher than the land in a suburban area over time. Either way, whether you’re considering houses or apartments, one of the most important property investment tips is to always buy in areas of high demand and with a relatively short supply of land such as inner city locations.
Apartments Outperforming Houses
Property commentators such as John McGrath have recently pointed to an interesting trend in which there is a steady increase in appreciation of prices of apartments over houses[i]. As a growing phenomenon over the past 10 years, apartments are supplanting the traditional “quarter acre suburban block” dream of property ownership, and are being seen as more affordable and convenient options. If looked at on a 5-year basis, apartment prices have grown an average of 7.4%, with house prices growing at an average of 7.1%. Analysts believe there are several significant factors driving this growth, including:
- The increasing affordability of new and off the plan apartments when compared with houses, with some commentators suggesting that median apartment prices can be almost 30% cheaper in major capital cities than comparable houses[ii].
- A changing demographic, with more 1 and 2 person households predicted to reach record numbers over the coming years – the Australian Bureau of Statistics states that smaller households will increase to almost 3 or 4 million people by 2026, up from 1.8 million people in 2001. Smaller households will require smaller homes, with inner city apartments near transport and amenities being high on the priority list.
It is also argued that rental yields will be higher for inner city apartments than houses – currently stated at 4.8% annually for apartments and 4% for houses – because they are normally built in highly desirable locations, near to transport, shopping, entertainment and educational facilities. Ultimately these factors are really the keys to the comparisons between apartments and houses as investments, as prices for apartments in remote and rural locations do not reflect the overall trend in higher price appreciation or rental income.
In terms of a long term strategy of investing in property this is great news for first time investors and those looking to build a property portfolio. New developments built within the major centres of Sydney, Melbourne, Perth, Adelaide and Brisbane will become the sort-after property of the future, both for those looking to purchase and for people looking to rent. Finding the right apartment can mean taking advantage of the changing nature of Australia’s demographics and our increasing desire to be “close to the action”.