No parking? Keep moving

PORTFOLIO POINT: Apartments that don’t have their own parking space are almost certain to perform badly as investments.

For me the phrase “Thank god it’s Friday” comes with a certain delicious irony because in the property business, Friday is a hectic day as we prepare for another weekend of inspections, auctions and negotiations. Of course, no matter how well laid your plans, there’s always the possibility of an issue arising that is beyond one’s control. And that’s exactly what happened last Friday.

Three weeks previously, we had identified an apartment in the suburb of St Kilda that looked perfect for one of our clients. It was a roomy, two-bedroom apartment on the top floor of a beautiful art deco block in a quiet residential neighbourhood. The property, in a leafy street opposite stately Victorian mansions, featured plentiful accommodation, a north-facing aspect and has a history of solid rental returns.

This particular part of St Kilda ticks all the boxes for investors and young home buyers keen to find a property. It’s seven kilometres from the city, only five minutes’ walk from two major tram lines and about 10 minutes walk from a train station and '¦ well, what passes for a beach in Melbourne! Also nearby, a popular shopping strip, enough nightlife to satisfy even the most social resident or if you’re in a more contemplative mood, acres of parkland running north to Albert Park Lake.

Perfect.

Not quite. Buried deep in the documentation, we found that three years before, all the apartments in this complex had been sold off by the block’s former owner with the buyers promised that a transfer of deeds for car parking space licence would be finalised. But this complex, with eight apartments had deeds listing car spaces 'A' through to 'G' – just seven spaces. Somebody’s apartment had been left out – the very apartment we intended to bid on. The deed had never been finalised and this proved to be a significant omission.

In the week leading up to the auction, we tried in vain to have the car space allocation made certain, but by Friday it had still not been satisfactorily resolved. Reluctantly, we had to tell our client that we couldn’t purchase this property as uncertain car parking rights would immediately exclude the property as a worthy investment prospect.

What followed for the unfortunate vendor was a perfect illustration of the value a secure allocation of a car space brings to an apartment.

At the auction, a small crowd gathered – a very small crowd, in fact, for this neck of the woods. Just 20 people stood and watched the auctioneer who certainly tried his best. I was one of the attendees, but rather than bid, I stood and watched with my hands tucked firmly in my pockets. And that pretty much was the reaction from everybody else. Despite the agent’s overtures, the apartment, purchased for $570,000 in 2007, was passed in and later bought for $646,500.

Let’s put this in perspective: this apartment with a secure allocation of a car park should have been worth around $715,000. Median unit prices in this area have risen by 38.4% in the past two years, but this owner had made a capital gain of 13.4% in a little over three years, or compound capital growth of just 4.1% per year – a dismal performance. On the day, this vendor missed out on $70,000 that should have been theirs if the car parking space right had been made clear and confirmed.

Many times, I’ve had it put to me that buying an apartment without a car space is a sound strategy as it’s a cheaper way to get into the right location. The surrounding land values will rise, the theory goes, and so will the price of a unit without a car space. As long as the apartment in question has an inner city location, lots of public transport and the amenities of urban life close by, all will be fine. The auction of this property is the perfect illustration of why that just isn’t the case.

For investors, it also makes for an interesting counterpoint to some of the more ambitious announcements made by local authorities recently. The City of Sydney’s draft Local Environment Plan 2010, for instance, calls for 55,000 new dwellings in line with the NSW government's metropolitan strategy. But to conform with sustainability principles, developments further away from public transport will be permitted more car spaces than those close to public transport routes. Similarly, in at least three inner Melbourne municipalities, developments aimed at the first-home buyer market now have up to 30% of units without allocated car spaces.

For many investors, it might be tempting to feel the pull of this ostensibly “sustainable” view of the world. No doubt, there are strong arguments for reducing the increase in traffic in our cities. But in 2010, Australian city dwellers overwhelming still rely on their cars to get around and if they live in apartments, a dedicated car space is a must.

The reason is fairly simple: a small block with 12 apartments often occupies the same amount of space as two or three houses, but the higher number of residents produces four to six times as many cars looking for parking in the same area. It’s this excess demand for parking that underpins the need and therefore the value of a car space for apartments. With more and more buyers and tenants heading for the inner city, the argument that makes the most investment sense to me is that units with a secure space are about to have their scarcity value increased as more and more apartments without parking are offered to the market.

From an investment perspective, my recent experience in St Kilda is a good marker of how much difference that can make. In five or 10 year’s time, when today’s investors may well be heading back to the resale market, the apartments with an allocated car space are most likely to be the ones showing the best returns.

Property Q&A

This week:

• I can’t find a low-rise apartment on the lower North Shore.
• I’m planning a big property development.
• Has Melbourne become overpriced?
• Are empty shops augur badly for an area?

Lower North Shore

You tend to recommend apartments in small blocks for investment purposes. I am interested in apartments around the lower North Shore or the Sydney CBD due to the cosmopolitan nature of these areas. Unfortunately, there aren't that many low-rise apartments – mainly high-rise towers with owner corporation levies. Would it still be OK to invest in one of these?

You’re right. Both of these areas do have a cosmopolitan feel to them. And while that is an attribute that many local residents will enjoy, I don’t think it’s a factor that will overcome the negatives of investing in apartments in high-rise towers.

High-rise apartments have two major drawbacks for their capital growth profile. First, and most important, the notional land value component for each unit in these large complexes is typically small, often just 10% or even less. That’s important because land value is one of the most critical drivers of capital growth and the less there is, the smaller the likely growth. Second, developers are continually building more of these units on the lower North Shore and in the CBD and fringe areas. This means the vast majority of these units won’t have scarcity value, another critical driver of capital growth.

As you are buying for investment, I would advise you to invest in low-rise, low unit number complexes and find an apartment with a notional land value component of 40% or higher. Stick to low-rise apartment blocks built from 1930s to 1970s as these buildings are favoured by the majority of purchasers and tenants and are in relatively short supply. This means the supply/demand equation will always run in the favour of the investor.

You should be able to find a low-rise apartment in north shore areas like Mosman, Cremorne and Wollstonecraft or alternatively in areas like Camperdown, Rozelle, Five Dock or Annandale. Not only will you be able to find an investment-grade apartment, but these areas also have a cosmopolitan feel.

First-timer

Do you think that building a triplex block of units is too big a job for a first-time property investor? Would it be better to purchase a house or unit instead? I am determined to make a sound choice but everyone has different opinions because of what has worked for them. A high rental return would be an important factor in my decision-making.

In a word, yes, I do think it will be too big a project for you. Some investors purchase residential property for its potential for physical improvement – including redevelopment into apartment complexes. It can be a path to investment success and wealth-creation but beware: the difference between success and failure, a big profit or a significant financial loss, is a fine one.

Some people take to property development like ducks to water and intuitively seem to understand how to make money from this enterprise. Those who are successful have all the requisite skills, including an understanding of the local planning laws, outstanding project management ability, financial controllership skills and a detailed understanding of the market place.

But for every success, there are many, many more who find out just how tough this business is - and can’t make a go of it. My advice is that unless you have all the skills required and significant financial resources, stick to purchasing an investment-grade established property.

If you are interested in becoming a developer the best course of action is to start small, make a good profit and get your confidence up have a look at the three options below. Make option A your first project. When that’s been a success, Option B is an example of the next level. And when that is accomplished, you might try Option C.
A: Renovating a house or apartment with a cosmetic makeover.
B. Adding a rear extension to an existing house.
C. Subdivide an existing house block into a dual-occupied development.

If you can successfully undertake each one of these projects in sequence and make a solid return of 20% or more then you will have a good appreciation of whether property development is right for you.

Melbourne values

I am a first-time investor in property and have a budget of $800,000. Property specialists suggest I invest in two properties in Sydney and Brisbane, but not in Melbourne, as house prices within proximity to the CBD are considered overvalued. Do you believe that investment-grade properties are overpriced in Melbourne?

I don’t think investment-grade properties in Melbourne are overvalued, and I don’t agree with people who refer to Melbourne property as overpriced. Melbourne has 90% of the population of Sydney, arguably the most diversified and robust economy in Australia, and a population growing faster than the national average. Yet Melbourne’s median house price is $42,000 or $48,000 cheaper than Sydney’s, according to RP Data and Australian Property Monitors respectively, or at about the same level as Perth.

However, there is quite a swathe of new development planned for the CBD. Many of these units will be referred to as “investment” properties by the media, some real estate agents and the sales people contracted to sell them. I don’t know why they are called “investment properties” as nearly all of them fail to meet any of the conditions of what I call “investment grade”. Unfortunately, I fear that many investors will follow the siren song sung by these developers only to discover later that the apartments they bought were overpriced and poor performers.

Are empty shops an omen?

I am a first-time investor thinking of buying a two-bedroom apartment in a middle-ring Sydney suburb. The area has excellent public transport, a nearby hospital, access to the M5 toll road, schools and two major shopping centres, but I have noticed a lot of empty shops on the main street. Does this mean it is a bad place to invest?

You haven’t provided me with the actual suburb so it is a little hard to tell, but the short answer is not necessarily. The infrastructure and service factors you mention are those that I look for in a prime property investment location. The fact that you are close to two major shopping centres and a motorway that links into Kingsford Smith Drive or takes you as far west as Liverpool is the explanation for the empty shops in this neighbourhood. Local shoppers are spoilt for choice and are favouring the major centres.

The other location factors you should be taking into consideration are:

• Is the apartment in a quiet residential street without adjoining commercial or industrial use?
• Are there nearby parks and recreational facilities?
• Is there a nearby university or TAFE college?
• Is there a nearby entertainment and restaurants strip?

If the answer is yes to all of these questions, then the property you are looking at seems to cover the broad location factors. But you still have other factors to consider: Is this apartment well positioned in a building that it is quiet and has abundant natural light and a pleasant outlook? Next, is it in a small, low-rise building that dates from 1930s–1970s, with no more than 25 apartments? Is the floor plan logical? Finally, does the apartment have dedicated off-street parking? If you have covered all of these aspects then you are probably on the right track.

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? Send an email to monique@eurekareport.com.au.