High Hopes

It’s Goliath versus Goliath: 2000 kilometres apart, two developments are waging a battle of the highest order '” quite literally. Melbourne’s Eureka Tower and Q1 on the Gold Coast are both chasing the title as the world’s tallest residential tower and, along with it, the hearts and hard-earned of cashed-up buyers in the prestige apartment market.

There’s little doubt that strong demand, quality fit-outs and the promise of a self-contained vertical village lifestyle with ocean, river and city views should fuel capital growth in the short term. But some investors might be wary of putting so much money into a single asset: prices start at about $350,000 for a one-bedroom unit on a lower level, and soar to $12 million for a penthouse.

So what’s the appeal? Standing 300 metres high with 566 apartments, the Eureka Tower is rising beside the Yarra River in Melbourne’s Southbank, opposite the CBD. The observation deck on Level 88, due for completion in early 2006, will be the highest public vantage point in the Southern Hemisphere.

If that’s not enough to make you giddy, the top floor windows will be made of gold-tinted glass to reflect the rays of the sun as it moves across the sky.

Benni Aroni, a spokesman for the Eureka Tower development company (Aroni has developed the tower in conjunction with his brother-in-law Tab Fried), says the building’s height and location are the biggest magnets for purchasers, particularly those in the middle of the market. “When we went into the marketplace, 90% of the stock we sold was located between levels 26 and 52. Buyers wanted the advantage of height without paying top price.”

The tower’s views of the city, Port Phillip Bay and Dandenong Ranges also have buyers clamouring for a stake. “Overseas, many apartment dwellers regard even a glimpse of daylight as a luxury,” says Aroni. “In Australia, we love an unencumbered view.”

The involvement of architect Nonda Katsalidis and builders Grocon (headed by Daniel Grollo) also gave the project considerable credibility among buyers.

“It’s a building without compromise,” says Brett Jarvis, director of selling agent Hocking Stuart Melbourne. “Residents are a minimum of 11 storeys above ground. All the fittings and finishes have been designed to minimise maintenance. The windows are double-glazed and there are pre-cast concrete walls between apartments so noise levels are minimal.”

Further north, Q1 is having the finishing touches done, for completion on Friday. The $500 million tower has 527 apartments set in a hectare of landscaped tropical gardens, four beach lagoons, a private health club and spa and the world’s only beachfront observation deck.

“On a clear day there are views up to Brisbane and down to Byron Bay,” says Sahea Abedian, joint managing director of Sunland Group, the project’s developer. “Today’s markets are very responsive to iconic buildings being constructed in different environments, and not constrained to CBDs and capital cities.”

“If someone chooses to live in an environment like this, they shouldn’t have to go anywhere to get what they need,” Abedian says. “Q1 is a vertical village. It has all the facilities of a five-star hotel including a 24-hour concierge, room service, in-house cinema and high-level security, within the context of a residential environment.”

Q1 has attracted some famous buyers, including star swimmer Ian Thorpe, who has also had a hand in promoting the development. More recently, the building attracted some unwanted media attention when the Queensland Supreme Court ruled that buyers had the right to rescind their contracts. The court found that Sunland did not tell buyers they had to purchase a $40,000 homewares and furniture package to be able to rent out their apartments through the on-site manager.

With the contracts due to be settled on October 14, the State’s Law Society has warned lawyers acting for Q1 purchasers they must be told about the court’s findings.

Though dominated by owner-occupiers, the two towers are also attracting investors. Rental returns vary depending on how high up the apartment is located and how extensive the views are. Still the rental returns as a percentage of capital value are pretty much consisent at around 5% to 6% offering a premium to average rental returns in blue chip apartment blocks of 4% to 5.%

Who’s paying these prices? The cheapest one-bedroom apartment on one of Eureka Tower’s lower levels costs about $400,000, considerably more than a low-rise apartment elsewhere in Melbourne. Not surprisingly, most buyers are owner-occupiers. Investor interest has been restricted largely to apartments with one bedroom or one bedroom plus study.

Most owner-occupiers live in their apartments from the outset, although Brett Jarvis says 10–20% decide to rent them out for a few years and claim the maximum depreciation allowances. Contrary to what the price may indicate, Jarvis claims Eureka buyers represent a wide cross-section of the community, from young single professionals, to baby boomer couples, to retirees who want to lock up and go on holidays without worrying about security. “Everyone’s saying the rental market’s dead, but we’ve just had a record month for leasing. People are leaving their apartments and heading for Eureka because it has such a reputation for quality.”

It’s a slightly different story at Q1. “Today, we have this move towards lifestyle-oriented purchasing,” says Sahea Abedian. “Most of the Q1 buyers are baby boomers from Sydney and Melbourne who want to spend some of their leisure time (and eventually retirement years) on the Gold Coast. Their primary residence will be down south, and Q1 will be their second home.”

This means that only half the buyers are full or part-time owner-occupiers. “The balance has been put into what we call the letting pool '” the serviced apartment environment.”

HIGHER AND HIGHER '¦

The higher the floor, the more it costs to build '” and the higher the asking price. Cade Hoy, selling agent for Q1, says two factors influence building costs: Materials and movement '” it takes a long time and requires specialised equipment to hoist concrete, marble and other heavy material 300 metres into the air; and labour '” working on tall buildings requires specialist labour hire firms and tradespeople who can command top dollar. Many tradespeople are paid an additional allowance for working at great heights. The higher they are, the higher the pay.

A key part of the appeal of these towers lies in their height, views and aura of exclusivity, so developers and marketers also factor an 'emotional premium’ into their pricing structure. Every buyer pays a premium for the five-star services, luxurious appointments and 'vertical village’ atmosphere.

“When we started marketing the Eureka Tower, our price points were considered astronomical,” says Aroni. “Several agents refused to get involved because they didn’t think people would buy at that level.”

In addition, each apartment attracts a different emotional premium, depending on its size and the floor it’s on. The higher the floor and the larger the apartment, the greater the emotional premium and the price tag. Cade Hoy says a single-bedroom apartment on the third level of Q1 is selling for $345,000; up on level 30, the same floorplan commands $440,000.

In the middle price range, Brett Jarvis says an apartment with two bedrooms and study on level 12 is on the market for about $690,000, or $6000 a square metre. Closer to the gods on level 59, the same size apartment is $1.03 million '” a whopping $9000 a square metre. Buyers with really serious money can snatch the Q1 penthouse for $11.5 million or the Eureka penthouse for about $9 million.

Figures from Hocking Stuart indicate that tenant demand is strong for the few rental apartments available in the Eureka Tower. All the available one-bedroom apartments have been let for about $500 a week. There is also strong demand for larger apartments; those with two bedrooms and a study rent for about $980 a week.

In Q1, where a substantial number of apartments are let to the holiday market, one-bedroom apartments rent for $380–450 a week, and two-bedroom apartments rent for $600–750 a week.

Whether you’re an investor or a home buyer, high body corporate fees are a fact of life in a multi-unit development. Someone has to pay for the concierge, security service, lifts (Q1 has nine, Eureka 13), air-conditioning/heating, pool, spas, saunas, gyms, window washing, landscaping of common areas and so on.

As a guide, body corporate fees at Eureka Tower or Q1 for a one-bedroom unit are about $2500 a year, and about $4000 for a two-bedroom unit.

Of course, estate agents and developers would sing the praises of the Eureka Tower and Q1, but would they live there?

Brett Jarvis, the selling agent for the Eureka Tower, says: “I’m going to. My bloody oath! I’ve lived in about 15 apartments over the past 20 years but Eureka is different. My wife and I are looking forward to moving in.”

Sahea Abedian, Q1’s developer is just as enthusiastic: “Absolutely I would live there, but I just bought a unit a couple of years ago. But some of my very close friends are moving there; it’s a beautiful building.”

THE VITAL STATISTICS

Both towers claim to be the world’s tallest residential tower '” so who’s right?

In terms of overall height, the honour goes to Q1, which stands 322.5 metres tall, has 80 floors and 527 apartments. Sunland is so keen to push its boast that Q1 is the biggest, it markets the building via the website www.qtallesttower.com.

Not to be outdone, Brett Jarvis says you can occupy or stand at least 50 metres higher in Eureka Tower than you can in Q1. “Eureka is the tallest at habitable height,” he says. “Q1 is only taller overall because it has a communications tower.”

Unfortunately, neither can claim the title of world’s tallest residential tower. The Guinness Book of Records bestows that honour on the John Hancock Center in Chicago, which stands 343.5 metres tall, even though only 50 of its floors are residential.

ACTION PLAN

Anyone considering investing in a prestige residential tower should weigh up affordability (how much it will cost you to hold the property on a week-to-week basis) against the key investment imperative: to buy a property with strong ongoing demand from purchasers to drive capital growth.

In a tower, the apartments with the strongest ongoing demand are those higher up; they have the best views, and are very often the largest apartments. The catch here is that it costs more to buy on the higher floors, where there are fewer apartments, so there’s a risk of concentrating too much capital in one asset.

Those who can only afford a smaller apartment lower down in the tower, among dozens or even hundreds of identical properties, may be better off investing elsewhere.

However, if you are determined to go ahead, we believe Eureka Tower is the better bet. This is because:

1. The Eureka Tower has a higher proportion of owner occupiers. In any market, it's homebuyers, not investors. who set the pace and underpin demand, because everyone needs somewhere to live, and most Australians prefer to buy than rent.
2. The Eureka Tower is the primary residence for most of its owners, who live and work in Melbourne permanently. This makes for a more stable environment than Q1, where a substantial proportion of owners only live for part of the year. If things get tight, their 'second home' will be the first to go.
3. Melbourne's property market is more stable than the Gold Coast. It is a permanent residential market with 10 times the population of the Gold coast region and a broad-based economy.

THE LAST WORD

If you’re buying purely for lifestyle, there’s little doubt that prestige apartment blocks like Eureka Tower and Q1 are pretty amazing places to hang your hat. If it’s rental income or capital growth you’re after, there are probably less risky (and less expensive) places to park your money.