One Bedroom Bliss

There was a time, not long ago, when one-bedroom apartments had a bad reputation as property investments. The limitations of these properties were said to limit the range of potential buyers. But all that has changed.

First, changing demographics with many more single people in the property market is underpinning demand for single bedroom unit. Second, the affordability factor has placed two and three bedroom properties out of reach for many investors or tenants.

Better still, from an investor's point of view - the long period when one-bedroom apartments were out of fashion meant that relatively few were built in Australian's biggest urban centres.

Apartment blocks built from the Art Deco period through to the 1960’s and 70’s had a higher proportion of two bedroom units. Therefore, the one bedroom apartments - especially with period features - are in short supply.

In fact, good quality, properly selected one bedroom apartments have, in the last 10 years, become a top performing addition to any property portfolio. Returns off these properties have shown 10% compound annual growth and are attract strong buyer and rental interest from both young and older Australians.

In the 1960’s and 70’s, the first major apartment boom saw mainly low rise, smaller blocks spring up in the high land value and consistent capital growth areas - city fringes and inner suburban areas that are 2 to 12 kilometres from a CBD. Demand for one bedroom properties was low at that time as Australians gravitated more to larger family homes in newly emerging suburban enclaves. Investors favoured the higher rental returns and perceived greater versatility of two and three bedroom properties. According to the Australian Bureau of Statistics, single bedroom units make up only 3% of all the nation’s dwellings.

Over the past 10 years, urban society has changed rapidly, particularly in regard to career oriented singles and independent retirees. ABS and census indicators show that couples without children will outnumber couples with children by 2016. People are staying single longer and the number of single women buying their own properties has doubled in a decade. Many in this category seek an inner urban, amenity rich, low maintenance lifestyle.

Provided a one bedroom property is properly selected, the purchaser can still enter the residential property market at a relatively affordable level with the added advantage of fewer risks of unforseen major expenditure or maintenance, while enjoying very good capital growth. One bedroom apartments in prime locations can still be purchased for around $300,000.

The basic rules of any residential property investment apply – strong capital growth that moves ahead of inflation and is underpinned by land value, scarcity, location, condition and supply and demand.

Properties in the inner urban areas that fall into the sub-$600,000 bracket are seeing very strong buyer competition. Often, smaller houses in this price bracket are in poor condition. A one bedroom apartment, on the other hand, is much more likely to be in liveable condition or requires little effort to bring it up to a high standard. Many people – particularly those with a busy, highly mobile single lifestyle - opt to rent and live in certain areas for lifestyle reasons when they can’t afford to or choose not to buy. Many older occupants are also prepared to pay a premium price for a property they know will require minimal outlays and they can rely on a body corporate for day to day repairs and maintenance.

In the apartment market, as well as the housing market, land value is crucial as this will underpin the medium to long term propensity for capital growth. Therefore, the smaller the block, the better the land value component. As a general rule, look for blocks with less than 20 units. Position in the block has an important impact. If it is at the back, receives poor amounts of light and overlooks the rubbish bins, washing lines and car park it might be cheap, but it won’t show optimal capital growth. Avoid apartments with no off-street parking. Also, take careful note of the interior layout to ensure it is fairly standard and liveable. You can still find spacious older style one bedroom apartments. Location is vital. Proximity to parklands, anything with uninterrupted views, a consistent aspect and similar architectural style to surrounding properties and access to shops and public transport will always attract a much higher price and it will continue to appreciate and maintain its appeal. Avoid main roads or noisy locations.

Establishing a correct market value for well established apartments is far easier than the process for new blocks. The established properties have a track record with transaction and comparable sales data readily available. Research similar properties that have sold in the area in recent times. For the busy investor with little time to attend to maintenance issues, the potential outlays or renovations required on a one-bedroom apartment are not as onerous as those likely to crop up over the life of a single, free standing property.

Occasionally we see new apartment properties springing up in established areas. Provided they are built to very exacting standards, they can be quite exceptional. If they combine the high land value you would expect from established properties in the area, with a high degree of sympathetic architectural style then they can offer the tax advantages some investors look for in new dwellings. Plus, they provide long-term capital gain. Be very sure to target quiet, highly sought after areas and buildings that blend very well with pre-existing streetscapes when buying new apartments.

The downside for new apartments is if they are built on previously under-capitalised land that has been reassigned from non-residential uses. Extras such as elevators, security systems and security parking can make body corporate fees quite expensive, so always check these first. Newer developments also tend to favour much bigger blocks and can be artificially priced to cover the development cost.

Many attractive well established one bedroom apartments lie right on the fringes of our CBDs rather than within the city centre. When assessing investment prospects on the CBD fringe, the key term is 'pre-existing’ as opposed to 'brand new’. Do not lose sight of the underpinning factors of land value and location. In some of these instances, views can add considerable value. Particularly sought after locations, such as close to attractive public gardens, river frontages, bay or harbour views and scarce architectural style – such as Art Deco – will push prices up but demand will remain very strong. It is crucial to ensure that if a view or particular aspect is part of the price driver, any surrounding precincts are well established and are unlikely to block those views with other developments. Make sure they have undercover or off street parking.

This week I have selected the following questions from subscribers.

Company Time

We’re glad you joined the Eureka Report and will keep on contributing your knowledge to this already excellent report. We are wondering if you could give us your opinion about the approximate price level of our investment apartment (company share, not strata title) in Acland Street, St Kilda and when is the best time to sell it? It’s a large, older style apartment in a block of only six with a garage and largish garden. It’s in a liveable condition with new carpets, though we aren’t sure if it’s worth investing money in cosmetic improvements or not.

Some of Melbourne’s most attractive unit complexes are company share and are often found in prime inner suburban locations. An opinion on value is dependent on many variables. Included among them are the general state of the economy, interest rates, availability of finance and local market fluctuations. Because of the diverse nature of property, an inside inspection of the unit would be needed to give a true valuation. You need to understand the characteristics that affect value such as the land value, the unit’s position in the block, how many bedrooms it has, whether it has parking, the aspect and amenities in the area. Determine these and then you can do a direct comparison with other units of a similar nature that have been sold in recent times.

Timing the sale of the unit is usually best at times of the year when supply of property for sale is low. This is often in the early or middle part of the year. This can yield exceptional results due to high demand and low supply. Other factors that need to be carefully considered when selling, including a conservative valuation, the property’s presentation, choice of agent, method of sale, marketing costs and an agent’s commission and negotiation skills.

Budget for Success

My husband and I are keen to sell the family home now that our children have left home. The home is almost 30 years old and has not had any renovations done. It does need some sprucing up before we put it on the market in about 18 months time, but we want to make sure we don’t overcapitalise it. What renovations would appeal to buyers, but not overdo the job?

The bottom line on renovations is that if the cost of an improvement doesn’t translate into a proportional increase in the property’s value in a relatively short period, then you have overcapitalised it. Renovations for sale need careful planning. The most affordable ways to add value are through cosmetic improvements such as repainting, replacing carpet or polishing floorboards. Improvements with a direct and positive impact on lifestyle and aesthetic appeal add tangible value to a property. Many home owners renovate to enhance their own quality of life, but if your aim is to make it more appealing for sale, then put your own personal tastes and emotions aside. Consider what will appeal to the widest range of buyers.

In an older house this might be remodelling a kitchen to make it more contemporary. Bathrooms are also a big item, but can often be successfully upgraded with new cupboard fronts, tap fittings, tiles, a new toilet and shower. Light fittings and curtains in bedrooms can be updated; built-in robes are popular and always go for neutral colour tones. Don’t forget the backyard! An attractive outdoor living area can add a lot of value for relatively little cost. Also, have a look at the level of renovation that has been undertaken to other properties that are for sale or have recently sold in the area to gauge what buyers are looking for. If they have fetched good prices in unrenovated condition, then all you need is a good tidy-up before you sell. If you do go ahead with the renovation, then work out a budget and stick to it.

Regional Differences

We have recently moved to Melbourne from inter-state and have started looking for a house to buy. Anything we are interested in sells at auction and we are finding this system a bit daunting. Any tips?

A property auction is not as complicated as people think. Doing your research is the first tip. Compare similar properties and sales results in the areas you are looking at. Attend a number of auctions as a spectator before you attempt to bid on anything for yourself. Be prepared to bid against a vendor bid. If the property suits your accommodation and lifestyle or investment needs and you are confident you have assessed its true value, then be prepared for the vendor bids. Auctioneers are allowed to make bids on behalf of the vendor, but they cannot be higher than the reserve price. You will see this happen when people stay silent when the opening bids are called for, so the agent is forced to open with a vendor’s bid. If you are the one holding the last bid when a property is passed in, you will have the first option to negotiate after the auction. Be strong minded and stick to your budget. Despite what many people think, the selling agent is not out to squeeze the last dollar out of you. Commission scales are such that it doesn’t make much difference if they get a few thousand dollars more for a property. They want it sold so they can move on to the next listing. If you aren’t sure where the bids are coming from, you have the right to ask the auctioneer to identify the bidders. Victoria has strengthened the laws relating to auctions. Agents are prohibited from underquoting the estimated selling price to prospective buyers. But, be aware that there is no way of prohibiting an unrealistic vendor from setting a reserve price that is outside his range. Auctioneers can also be prosecuted for taking 'dummy bids’ and vendors are no longer allowed to plant 'dummy bidder’ friends or relatives to drive up prices.

Units of Measurement

When looking at investment properties, what are the advantages or disadvantages of buying a unit rather than a house. I feel a unit would require less maintenance.

The difference in capital growth between houses and units is marginal and slightly favours houses. However, that small margin is often taken up with the smaller amount of annual maintenance on a unit. A house that has been properly inspected for defects and pronounced structurally sound will minimise your maintenance bill as well. If you prefer a super low maintenance option, units can be a good choice. Remember though that units don’t have the same scarcity value as prime houses and it is relatively rare to find units with land on the title. It is the land content that primarily appreciates in value. Always check body corporate certificates on units as these will reveal any levies or work required in the overall unit development. Units are attractive to tenants as they don’t have a gardening component. If they are in a good street, near public transport and shops, they will also have high appeal. Both units and houses attract excellent tenants if they are neat, clean and well located.

* Purchasers of apartments will come across the terms “Strata Title” and “Stratum Tiltle.” and often ask what the difference is.

STRATUM TITLES – This is often referred to as “company share.”Stratum title developments were common before 1962 as own-your-own flats and units became popular investments. Under this title, the entire building is sub-divided into separate units and a company is incorporated to act as a management company. The purchaser acquires sole and exclusive use of an individual apartment and holds an interest in the common property or land outside the main building through shareholding in the management company. Be sure to carefully check the articles of association of the company to ensure there are no onerous restrictions.

STRATA TITLES – In 1967, Strata Titles were introduced to do away with cumbersome administration rules. Under these titles, you purchase the title to an individual property and have a share in the common ground through a Body Corporate. Under these titles, a purchaser can have “accessory units” which can cover your entitlement to car parking, storage units or other accessory units that can only be transferred collectively. Again, look carefully at the rules governing a body corporate for any block of apartments.

Monique Wakelin is co-founder of Wakelin Property Advisory, www.wakelin.com.au, 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