Heritage values

PORTFOLIO POINT: Heritage controls can add to a property’s appeal, but investors should do their homework.

There’s plenty of debate about whether older or newer style properties are the best investment choice. Debate is healthy but there is a reason why real estate advertisements with headlines like “full of character” and “loads of charm” dominate the classifieds.

It’s because people like Federation houses, Victorian terraces, Edwardian worker’s cottages and the often leafy and pleasant streets they reside in. They like them so much they continue to buy them or rent them at a premium often above other less distinctive properties.

I believe there is growing evidence to support the view that moderate heritage controls, overlays or even heritage listing may have a positive impact on property values. But it’s important for people looking at potential investments in suburbs with historical appeal to understand the various levels of government control over properties deemed to have heritage value, and how this affects their investment decisions.

Some areas of our cities are open slather, meaning the lack of restrictions is slowly rendering formerly historical streets with consistent architecture a hodgepodge of architecture without much resistance from planning regulators.

“McMansions”, modernist monstrosities and ugly apartment blocks may become your neighbours in time, so it’s not surprising that residents of architecturally consistent streets oppose “inappropriate development” so vigorously.

The first level of heritage control deems that certain areas of “local significance” are identified within the local council’s planning scheme. These properties are afforded protection via a heritage overlay control.

This means a planning permit is required from the council to subdivide or consolidate land, demolish or remove a building (including part of a building); construct a building (including part of a building, or a fence); externally alter a building; display a sign; paint an unpainted external surface; and externally paint a building if the painting constitutes an advertisement.

The next level up that is registration on State Heritage lists. This is followed by the National and International Heritage lists (which include the Melbourne Exhibition Centre and the Sydney Opera House).

NSW Heritage Branch director Petula Samios says heritage listed buildings are best cared for when they are lived in and loved. This means they must be useable. She stresses that heritage listing does not exclude changes or additions or new buildings on the site provided they don’t detract from the heritage significance of the listed items.

“This is consistent with what most owners want for their heritage properties. It is also consistent with advice from real estate agents that well looked after heritage properties are the easiest to sell and bring the highest prices,” she says.

“Listing also does not exclude the adaptive reuse of a heritage item for another use. Sometimes this is a sensible way of ensuring the use and care of a heritage item. For example, the conversion of a warehouse to residential use or the adaptation of a house to offices.”

Indeed, there can be multiple benefits for owners of heritage-listed properties, including councils agreeing to and protecting land use changes, site coverage and car parking bonuses unavailable to other owners. “Some heritage agreements can attract land tax, stamp duty and local rate concessions and listing enables access to heritage grants and loans through government funding bodies,” Samios says. It is not unknown for property owners to receive sums of up to $10,000 from local councils.

On balance, investors still need to weigh up whether heritage overlays or listing protecting the value of pretty streets and historic homes will hamper investment returns in the long run. If property enhancement is made onerous, impossible or is perceived to be by potential buyers, resale options may be restricted to those able and willing to comply with heritage requirements.

Executive director Jim Gard’ner says Heritage Victoria had reviewed a number of studies that investigated the effect of heritage listings on property values and development potential.

“Research, both domestic and international, indicates that heritage listing on a macro level is not a significant factor in determining property value either at the time of listing or after,” he says. “However, there are individual cases where the effects are more significant, either positive or negative.

“Heritage property values are determined by multiple factors including zoning, planning overlays, size of property, types of surrounding properties, general amenities, tenancy opportunities, alternative property use, returns, current socio-economic conditions and the quality of the buildings.”

Specific factors also include prestige associated with ownership, refurbishment costs, building efficiency, maintenance and operational costs and perception of risk. Recent studies of heritage controls affecting property value are difficult to unearth but a study conducted in 2000 by property analyst Scott Keck for valuers Herron Todd White is revealing.

Keck’s aim was to identify the effects of heritage controls and values on properties in the City of Stonnington, in Melbourne’s east. Of the 48 properties proposed for inclusion in the Stonnington Heritage Overlay in early 2000, the adverse effect on property value, as a group, was estimated at 15% on average, with a total value for the group reducing from $66 million to $56.15 million.

This drop in value was estimated for those bigger properties that could be demolished and the land redeveloped for new large single residences or mixed use. So the greatest incidence of negative valuation impact was for those with “highest and best use and therefore value” related to land alone.

The decrease in value, assuming the existing buildings could not be removed, was estimated at 20% on average, with an individual decrease ranging from 10% to 60% in one extreme. The other 50% of properties in the study, which were not slated for redevelopment, were estimated to have had little or no impact on their value due to heritage controls.

Richard Jellis, managing director of Melbourne’s Jellis Craig, supports my contention that properties in precincts with historical significance often make for sound investments as long as the restrictions are not overly severe, particularly those areas where owners have no intention of demolishing and rebuilding or seeking rezoning.

Jellis says some heritage overlays mean protection is afforded for investors and owner-occupiers who then have confidence that “several hideous modernist cubes or ugly apartment blocks won’t appear down the street”. Jellis, a resident of Melbourne’s Albert Park where smaller allotments, of six metres by 35 metres, “don’t lend themselves to redevelopment” says his suburb is a classic example of heritage values enhancing property investment.

“People understand and respect that keeping 1880s streetscapes intact adds to the appeal of each home and the whole street; this shows up time and time again with property purchases in the suburbs of historical value,” Jellis says.

He cites the example of a particular street with double-fronted Victorian homes where lax heritage controls allowed the construction of multiple apartment blocks in the 1960s and 1970s. Property prices in this street have not kept pace with architecturally consistent streets nearby.

Protection of property value is important for investors as long as the controls don’t hamper appropriate and sensitive refurbishment that is in keeping with the original streetscape.

There is a point, however, where over-protection or meddling by governments may impact on the future growth because the pool of future buyers will be limited to those willing and able to uphold specific and stringent heritage controls. Investors should get a feel for their local council’s modus operandi when it comes to retaining heritage values as part of their overall research when selecting period properties as investments.

Property Q&A

This week:

• Should I worry about mould and leaks?
• I’m considering buying outside Townsville.
• Melbourne on a budget.
• How will our Ardross property perform?

Wrong way. Go back

I am interested in a new three-bedroom apartment in Sydney’s inner-west. The apartments look to have an above-average build quality, however a friend of mine told me there have been complaints about mould growing on the walls on the ground floor units and leaks from the ceiling of the garage. I obtained a building inspection report, which stated, “A damp proof coursing material could not be identified.” Some residents also complain that they can hear toilets flushing in the apartments above. The unit I am interested in is on the top floor so these issues are unlikely to affect me but I am still concerned.

Stop! Go no further! Your experience with this complex is a good illustration of why I always urge investors to obtain a building inspection on any property they are considering buying, be it new, old or in between. While it’s easy to be impressed by the glowing finish of a recently built complex, problems can lurk beneath the surface.

The mould growing on the walls of the ground floor units could be the result of either rising damp or because the units are not adequately ventilated. The audible sound of toilets being flushed could point to inadequate insulation around the sewer pipes. And the water leaking in through the ceilings of the ground floor units is quite unbelievable in a newly built structure. Taken together they tell me that the construction of this complex has been rushed, poorly executed or badly designed.

You should avoid buying into this complex, even on the top floor as who knows what other issues might arise. If the current issues are not fixed adequately and fast, the building is likely to get a very poor reputation with local real estate agents who will pass on that reputation to potential buyers in the market. Even if the existing problems are rectified, the building could be avoided by many buyers for some years to come, leading to poor capital growth outcomes.

I think you should revisit your strategy. Investors should always buy into established property to avoid problems with a new construction, not to mention the 20% premium incorporated into the price tag of a new complex. Right now I favour one or two-bedroom apartments as these have higher demand from buyers and tenants and tend to record a better rental return.

Townsville estate

I have been approached by investment group suggesting I purchase a new four-bedroom house for $400,000 in Bushland Beach in Townsville, Queensland. This new estate will see 2500 houses built in stages, with 1000 built so far. There seems to be good infrastructure in this area, including new shopping centres, a new school and sport centres. My concern is that there are 80 houses on the market at the moment and 25 more available for rent. Will this property have good capital growth or should I be looking at other areas?

Townsville has experienced an influx of interstate migrants in recent years, attracted to mining jobs in North Queensland, the growth of Defence facilities and the tropical lifestyle. This growth in population and the local economy have resulted in the Townsville median house price rising 71.3% over the past five years, an outstanding result for property owners.

However, new housing is usually not the best option for investors. New estates tend to underperform on capital growth. New estates tend to see the supply of new property increase within them and on other new estates established nearby. The result is an abundant supply of new properties coming on to the market yet demand is either variable or poor, as budget conscious first-home buyers and families dominate the buyer types in new estates. The other problem is the builder’s premium of about 20% which typically takes around five-to-seven years to be absorbed.

My advice is that investors should stick to the inner and middle-ring suburbs of capital cities, as the right properties in these areas tend to have the best long-term capital growth profiles with the least short-term variability.

Buying in Melbourne

I am 48, single, have three children and am renting in the northern suburbs of Melbourne. While I’m happy to rent for a few years, I’m aiming to invest in a property that I will eventually live in. My preference is to be within 12 kilometres of the city, in an area with strong demand from renters and the best possibility for capital growth. How much I would need to pay to achieve this outcome for a two-bedroom house or unit.

It’s an interesting question. While the price growth in over the past few years has pushed up property prices across Melbourne, there are areas with relatively affordable property that have good prospects for growth.

But first you have to decide on your most important objective: investment performance or finding a place to live. Many buyers today want to combine both of these outcomes but my advice is to ensure that when it comes to the crunch, one or the other is identified as more important. The best way to think of this is that one aim must be at least 60% of your decision and the other no more than 40%. If you approach this purchase with a 50:50 weighting you may find that you turn away from good investment options because a property does not suit your lifestyle, and back away from your perfect home as the property does not make the investment-grade benchmarks.

For the purposes of your question, I will assume you decide that your equation is 60% investment 40% lifestyle. For an investment-grade house, you will probably need to a budget of $700,000–800,000, which buy you a house in the outer ring of the inner north, about eight to 12 kilometres from the CBD. The best areas to look in are suburbs such as Moonee Ponds, Kensington and Ascot Vale in the northwest, or select parts of North Brunswick, Coburg or Preston in the north. It’s important that you limit your search to single-fronted, two-bedroom period-style houses with logical floor plans in quiet residential streets.

If you have a budget of $625,000 or more, you should be able to find a high-quality apartment with the right attributes for above-market capital growth in inner bayside areas such as St Kilda, Middle Park and Elwood, or in eastern suburbs like Balwyn or Surrey Hills. If you can’t afford this much but have more than $550,000, look for a two-bedroom apartment. Make sure you narrow your search to investment grade apartments, which are well positioned in an established, low-rise complex with no more than 25 units. There are some investment-grade apartments in the inner-north but they are hard to find.

The Ardross outlook

We have bought a low-maintenance, strata-titled single-level property (only two in the group) in Ardross, WA. It is on quite a busy street, but it is a rear property and seems to be unaffected by the traffic. The property is a stone's throw from the suburban shopping centre, on a bus route and is walking distance to a bus terminus, medical centre, entertainment strip and a host of other facilities. What is your view about the growth prospects for such a property?

Ardross is a promising suburb for investors, located in the inner-ring of Perth’s southern suburbs. There are many positives for this area, many of which you have mentioned such as entertainment, transport, shopping and there’s also the well-liked amenity of the area, proximity to the river and access to good schools.

There are a couple of issues with this property’s investment potential, which I should point out. A strata-titled unit sharing a subdivision with one other unit, or a villa unit as we know them on the eastern seaboard, tends not to have the optimum profile for capital growth. Some buyers are deterred by the perception of poorer access to their unit through a shared driveway. The other negative is your unit’s location on a busy street. Even though a rear unit will be less affected by traffic noise than the front unit, a busy street will deter some buyers and this is likely to affect capital growth over the long term. I would suggest that a street in the this location which is busy now is only likely to get busier as local shopping centres are set to expand and more residents move into the nearby Canning Bridge development area.

So in summary, I would say that while you have some factors working for your investment, you have two factors working against it. This is likely to see your unit experience around market-average capital growth over the long term.

Monique Sasson Wakelin is Media and Communications Director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique Sasson Wakelin? Send an email to monique@eurekareport.com.au.