Should investors buy into infill?

New estates in inner-city areas can perform over time, but tread carefully.

PORTFOLIO POINT: Inner city infill property developments have certain appeal but investment returns can be mixed, especially in a slow market.

There will be substantial home building in Australian capital cities over coming years and decades.

That’s the inescapable conclusion from the strong population growth reported in the recently released 2011 Census. Whilst much of the construction will take place in our fringe suburbs, governments and developers are increasingly seeking to reassign large tracts of former industrial and other redundant land within our inner and middle suburbs for residential use. Should property investors see infill developments as an opportunity or stay clear?

There are certainly a number of positives about infill development, especially compared to its fringe suburb counterpart. The most obvious is location. Many of these new residential estates are only a few kilometres from the CBD, as opposed to 40 or 50 kilometres. As well as much shorter work commutes for residents, infill developments also benefit greatly from the existing hard infrastructure in the surrounding area – such as roads, schools, childcare facilities, medical facilities and the like. As importantly, infill developments have proximity to the things that give an area a 'soul,’ such as village-like shopping strips, cafés and restaurants.

It’s this combination of the new and the familiar which developers of infill estates push hard. For instance, consider Harold Park, a Mirvac development in the inner-western Sydney suburb of Glebe. I recently visited the yet-to-be developed 10.5 hectare site, a former racetrack. The emphasis of the sales program is very much on the lifestyle experience to be had in Sydney’s inner-west. Indeed, the lush 36-page A3 sales brochure devotes no more than eight pages – relegated to the back of the brochure – to the actual properties themselves.

Once completed, Harold Park will be home to 1,250 prestige apartments and terraced homes across 17 blocks ranging in height from five to eight storeys. Although the developer is keen to highlight that 35% of the site will be left as green space, most of this will sit close to the perimeter of the site, so the blocks themselves will be quite close together. Make no mistake, this will be high-density living – and quite a contrast to Glebe’s classic Federation and Victorian architecture that the estate is nestled within.

The development will deliver a wide spectrum of accommodation types – 45 square metre studios; one bedroom, two bedroom and three bedroom apartments; penthouse apartments; and terraced housing on the ground floor. Only half of the properties will come with car parking. With prices for the studio apartments around $500,000 and one bedroom apartments listed below $600,000, a target market is the first home buyer armed with recently enhanced grants and stamp duty concessions from the New South Wales government.

Many investors appear to like the look of Harold Park, with the cohort representing around a third of sales, according to the sales rep at the display centre.
Of course, only time will tell if these investors will make a sufficient return. But it’s worth looking at the experience of another Mirvac development – Beacon Cove in Port Melbourne – to appreciate that there is a lifecycle for infill developments.

Beacon Cove, a former industrial site, is a mixture of high-rise apartments and medium-density housing, totalling around 1,100 dwellings. It was an instant success when the first-stage properties were listed in 1996, according to David Lack, an estate agent at Biggin & Scott in Port Melbourne. “Most of the properties sold within hours and all were sold within days. There were long queues with people camping out overnight to secure their place,” he says.

But Lack observes that Beacon Cove properties tended to struggle on the resale market in the early years. “It wasn’t until around 2001 or so that Beacon Cove properties started to show a good profit on resale. Part of that can be explained by resale properties competing against the ongoing release of new stock by Mirvac.”

Lack also suspects that the properties were initially over-priced. “Back in 1996, the original three bedroom houses were listed at $305,000 by Mirvac. We were selling comparable townhouses in Port Melbourne for prices up to $260,000.”

Subsequently, Lack believes Beacon Cove has performed in line with the broader inner bayside market, although he acknowledges that an investment in more established property in neighbouring Albert Park has shown slightly higher growth. Capital growth data from Australian Property Monitors supports this view.

Over the last 15 years, house prices in Albert Park have risen 321%, whilst those in Port Melbourne have only recorded 249% growth. Over the last three years, houses prices have risen by 51% in Albert Park compared to 26% in Port Melbourne.

The lesson from Beacon Cove for investors considering buying into infill developments is to tread carefully. Done well – built in a good inner suburban location, with quality design and construction – a new estate can perform reasonably well, eventually. But they do tend to struggle capital growth-wise for the first few years. Moreover, they never seem to quite match the performance of top grade, established investment property.

When the property market is booming, it is understandable that some budget-constrained investors who struggle to outbid others for established property resort to buying in new estates. But in a slow property market where competition is light, and it is possible to buy into the established inner suburban market, there’s really no need to settle for second best.

Property Q&A

This week:

  • Is selling in Perth and buying in Sydney a good plan?
  • Will population growth aid the inner city areas?
  • Clarifying maintenance and improvements.
  • Selling a low-growth apartment.

Selling in Perth and buying in Sydney

I would like to sell my one-bedroom investment unit in Perth to re-allocate the funds to buy a similar unit in Sydney to live in eventually. Any comments or suggestions much appreciated.

I have no problem with this approach. Values in Perth are good at the moment off the back of the resources boom, but the long-term capital growth record is not as consistent as Sydney’s. This is a good time to purchase in Sydney – prices are fair and have every chance of strengthening in the medium term.

The one challenge is finding a property that meets both your lifestyle and investment needs. It may not be completely possible and compromises may need to be made. Decide upfront which goal is most important to you. This will help you work out the best balance of location, accommodation and cost. As always, choose the asset wisely – selection is the key.

Population growth and inner city property

In your recent article you related population growth with the demand for more housing and subsequently rising property values in the inner and middle suburbs. But how much of this population growth is made up of people building or buying in outer suburbs where property is more affordable? My concern is even though demand for housing may increase, how many of these people can afford to buy inner city housing in capital cities for $1 million plus?

You’re right that the vast majority of new entrants end up buying in the outer suburbs of our cities. Even if people could afford inner and middle suburb prices, there isn’t the room to fit them in! However, there will always be a proportion of new entrants who have above average financial clout and desire to be close in. Given prices are set at the margin and supply is virtually fixed in our inner and middle suburbs, it only takes a modest increase in demand fuelled by population growth to push up prices.

Moreover, as our cities become bigger, it is likely that we will see greater congestion on our transport links because infrastructure upgrades will lag population growth. This in turn will increase the appeal of those inner suburbs where commute times are lower.

You wonder how many people can buy $1 million plus properties, but they are already quite common in our inner suburbs, and I’ve no doubt that will increase steadily over coming years. That may seem unaffordable, but the truth is, as far back as I can remember, quality property has always been considered unaffordable. In hindsight, we realise otherwise.

Maintenance versus improvements

Last financial year we had our investment property’s tiled roof cleaned, repainted and sealed and the driveway cleaned, re-stencilled and sealed at a cost of $4,500 for each job. We have not changed anything on the roof or the driveway beyond these works and we are hoping to claim these as expense items versus depreciating them as capital improvements. Is this correct?

The test that the Tax Office will use is whether the work is an improvement or just maintenance. If the works are judged to be an improvement beyond that which existed when the person bought the property then the works have to be capitalised and depreciated; if maintenance, then the works can be claimed as an expense in the year in which they incurred.

From your question, it sounds like your works fall into the maintenance category. However, you should seek guidance from your accountant in the first instance. The accountant will advise if input from a tradesman or surveyor is also required. (Thank you to ProSolution Tax Advisory for assistance with this answer)

To sell or not to sell?

I have a mortgage on an unremarkable 70s style, two bedroom unit. I’ve owned the unit for nearly 10 years. It was purchased for $330,000 and I had it valued a few years ago at $400,000. With a large hospital and a big university close by (Randwick, Sydney) it’s never been without a tenant. Two big, glossy (and controversial) developments are about to be built in the street adding close to 900 sparkling new one- and two-bedroom units. Since my tired 70s-built property will suddenly have lots more competition for tenants and potential buyers, I’m wondering if I should hold or sell in the face of a much larger market and more modern properties, before the developments are complete?.

Of itself, the locating of two apartment blocks wouldn’t be too much of a concern for me if your property was a high-quality apartment in a low-rise block on a good street. Although there is some overlap in demand from renters between new high rise developments and established apartments, there is a big slice of renters who will only consider old style apartments.

However, I’m concerned that your apartment sounds like it doesn’t have the requisite qualities for resilience. In the first instance, I recommend you have the property revalued so you can properly assess the capital growth of the property over the 10 years you have owned it. If, as I suspect, the results show that this property has shown perennially poor growth then it may be time to dispose of it, given that the broader Sydney property market has fared reasonably well over the last 10 years. The scale of the two developments on your street leads me to think that your property is on a main road, which may in part account for its poor performance.

Monique Sasson Wakelin is a director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.

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

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