Lapping up luxury apartments

Apartment living – in New York it’s as ubiquitous as the corner hot-dog stand. And it seems that at the very top end of that market the investment opportunities are surprising. As with so many of our domestic housing trends, the US experience is often indicative of what the future holds here. In Sydney and Melbourne in particular developers and affluent, aspirational investors aged between 45 and 60 are catching on fast.

What Abigail Newman, former chief concierge of the Intercontinental Hotel in New York, doesn’t know about the New York Luxury apartment market isn’t worth knowing. Her company, Abigail Michaels Concierge, provides five-star hotel calibre concierge services to top-end residential developments.

Newman confirms that buyers are typically wealthy, aspirational and expect their lifestyle assets to deliver a solid growth performance to boot. “We’re seeing large numbers of international buyers from Asia, the Middle East, Russia and the UK in addition to American empty nesters opting to own rather than stay in hotels for extended periods. They are attracted by a combination of asset security, pride of ownership, convenience, club lounges, private dining rooms, business centres and health clubs which, in these new high end buildings, are the norm.

Relatively speaking, there’s not much new development possible. Manhattan land is effectively all accounted for. “What’s there is all there will ever be,” Newman says. “Buyers love the combination of having their private apartment and yet knowing that a hotel-style concierge service can cater to virtually any request – from a restaurant reservation through to daily maid service or dog walking,” and, as Newman puts it, “total lifestyle management.” Newman believes that “the hotel experience is very much the trend and looks like becoming an entrenched way of life here”.

As far as capital growth is concerned, Newman’s observations suggest that many high-end buildings, where prices begin at $1.5 million US “for a shoebox” at 15 Central Park West through to $60 million for a substantial apartment at the Plaza (Hotel on Fifth Avenue), is not to be sneezed at. “It’s quite common to see buyers 'flipping’ their apartments over within a year for a $US500,000 profit on the original purchase, price, simply because of the cache value of buildings such as the Lincoln Centre redevelopment, the AOL Time Warner building, the Plaza or 15 Central Park West,” she says.

Newman’s comments reveal many parallels with the emergence of Australia’s luxury apartment market.

Apartment ownership in Australia has traditionally been regarded as a stepping stone to buying a house, but that is changing. The new luxury apartment in Australia sector shows all the hallmarks of mirroring the New York experience albeit more slowly because of basic differences in the structure of our urban environments and population density. Increasingly, the empty nester Australian baby boomer is selling the suburban family home and either moving into a new CBD or inner suburban apartment for the city lifestyle and “lock up and leave” convenience.

James Hall, national director, residential, at Knight Frank, confirms the beginning of the US-led phenomenon here in Australia, especially in Melbourne and Sydney. “Twelve months ago we began to see a big drive from high net worth individuals wanting to downsize from very substantial family homes but still maintain a very luxurious standard of living, so the demand side is well and truly there and strengthening. The problem is a lack of supply at this very top end,” he says.

Research from RP Data shows the key characteristics underpinning luxury apartments in Australia include water frontage or water views, park frontage or park views, large internal areas and large usable balcony areas, accommodation upwards of three bedrooms and close proximately to a CBD. Of course these fundamentals are the same ones that generally confer a solid investment performance because such characteristics are scarce; they’re not readily replicated in the wider market place.

Hall and RP Data both confirm that key areas both in supply and demand are focussed close to Sydney’s and Melbourne’s CBDs.

Hall emphasises that in Sydney Woolloomooloo’s Finger Wharf and Point Piper’s Sienna developments are superb examples of the genre, as are developments in Potts Point and Milsons Point. Hall’s observations of the emerging Australian trend is very much in line with the New York one: he confirms that “the entry level, for example, might be around the mid-$2 million in Walsh Bay, through to around $20 million or more depending on location, size orientation and aspect – and, yes, the five-star hotel experience is very sought-after at the top end.”

“These days, 50-plus is no longer old – it’s considered the prime of life,” Hall says. “Moreover the population is far more mobile these days and life is more hectic. Baby boomers are much more interested in travel, and spending their time with friends and family or at the footy, art galleries or the theatre. And they’re the most affluent generation we’ve seen. They have the means, the motivation and they don’t want to be tied down. They’re looking for a product that is only just beginning to come on stream. They want everything literally on their doorstep.” Several developments are headed in that direction, including Salta’s 150 Clarendon Street in East Melbourne (the former Mercy Hospital site), which looks west over the Fitzroy Gardens to the CBD. Think Central Park and Downtown Manhattan views. The complex will offer 24-hour concierge, private cinema, club and conference room and spa facilities.

Buying off-the-plan and “flipping” apartments over is commonplace in Australia, even at this level. Hall cites several examples, including a development in Lavender Bay where a $3 million apartment was bought off-the-plan in 2005 and sold within a week of settlement for $3.8 million, and another in Woolloomooloo that was bought in 2004 for $7 million and resold in 2006 for $11 million.

So where does this leave the urbane, already financially secure and savvy Australian aspiring “lifestyle investor”? In my view, the bottom line is that if this is a financially viable and attractive lifestyle option, go for it!

But a few very serious “watch outs”.

• I rarely support buying-off the plan, but at this level, where genuinely unique developments are coming on the market, they are often sold out. That means you'll have little choice but to pay up in advance. lf you’re buying off-the-plan, have your own independent solicitor review the contract. Be aware you are buying sight-unseen and developers can and do exercise their option to vary specifications, facades and finishes. They also frequently run behind schedule. Know your rights and don’t be afraid to exercise them.
• Go for small, select, relatively low-rise apartment blocks in areas where the supply will be strictly limited and where there will be little competition from other apartment buildings.
• Don’t assume numerous resales in a building are an automatic indication of owners selling to realise stupendous capital growth. If you are intending to buy into a complex where a number of resales have taken place, always ascertain the original sale price, the length of original or subsequent ownership and the final resale price before you commit. Complexes that are tightly held often show better growth than those where turnover is high because it’s an indication that people like living there and want to stay put.
• Choose an apartment with favourable views that can’t be built out, and have good natural light.
• In this market niche, parking for at least two cars and extra storage are a must.
• Finally do not, repeat, do not attempt this strategy as a one-off investment “punt” in the hope of making a fast killing in the property market. This is primarily a lifestyle option for those with substantial means who are not reliant on their residence as a wealth-building tool.

Property Q&A

This week's questions cover:

• Tighter bank lending conditions.
• Spending $700,000 on residential investments.
• Negative gearing.

Tighter bank lending

I’ve been saving the deposit for an investment property but I’m now finding that my bank has changed some of its lending policies, and I can’t get the same amount of loan. What’s going on with the banks? Last year they kept hounding me with offers of credit cards and offering me huge loans!

Well might you ask “What’s going on?” In very simple terms, because the amount of funds available internationally is substantially reduced as a result of the credit squeeze and the US sub-prime mortgage fallout, the flow of funds available to banks and other lending institutions is more restricted. In addition, the climbing number of repossessions here and overseas is making lenders nervous and causing them to become more cautious about how much they are willing to lend as a proportion of a property’s value.

Banks are also focusing more heavily on asset value than the borrower’s cash flow capacity. This may be why you’ve been offered less money. I suggest that while it may be inconvenient, the bank may well be doing you a favour as well as protecting itself! As long as you don’t buy into an inferior location or style of building, I would suggest you aim for a smaller amount of accommodation – a one-bedroom apartment with allocated off-street parking instead of a two-bedroom, or a really good two-bedroom art deco apartment instead of a small house. As long as you are selective, you will not be disadvantaged by a change in price category.

A $700,000 investment

I want to buy an investment property and have about $250,000 in cash. I’ll be retiring in a few years and I’m not keen on too much debt so I’ve set a limit of about $700,000 as a purchase price. I’m keen on buying a house rather than a flat or apartment; I would value your opinion on my strategy.

First, I think it’s very wise to focus on having some considerable equity in an investment, especially in a climate of rising interest rates and if you’re approaching retirement. You don’t say which city you are planning to buy into, however, with $700,000 it’s fairly safe to assume you could buy a house in most cities, although Sydney might be more challenging. Be sure you stick with a proven blue-chip location, two to 12 kilometres from a bigger city or within five kilometres of a smaller one. Go for quiet side streets and timeless architecture. If you’re banking on Sydney, good two-bedroom apartments in select locations and always with off-street parking, are well worth considering.

Negative gearing

I wonder about the value of negative gearing. It effectively locks home buyers out of the market because the tax advantages it confers give investors an unfair advantage in the market against would-be owner-occupiers.

In theory, your argument is interesting and has merit. However, in the real world, the proportion of investors relative to home buyers is very low indeed. Australia’s home ownership level of about 70% is among the highest in the world. It’s actually emotionally driven homebuyers, armed with a plethora of government-sponsored grants, rather than the small numbers of investors that drive the market place and dictate price and demand trends.

Second, if tax incentives to investors were eliminated, rent levels would skyrocket, just as they did when negative gearing was quarantined in the 1980s. The fallout then was so significant that the government had to repeal the legislation completely. In the current climate of low affordability and stock shortages both for tenants and aspiring homeowners, the result would be nothing short of disastrous. (To read more on new tax incentives in the 2008 Budget see Today's lead story).

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.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

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