Here are the key considerations.
Location
Firstly, as you would expect, location is key. Typically, the best apartments are located 2km and 10 km from a CBD.
These are commonly blue ribbon suburbs, with older style, quality-built apartments, with finite supply.
In contrast to CBD areas, height restrictions in suburban zones prevent extensive high-rise development. The established inner suburbs were among the first to experience the construction of the types of apartment blocks we know today, resulting in a good supply of low density units, typically with no more than 20 units in a block.
While the sparkling finishes of new CBD high-rise developments might impress at open-for-inspections, they suffer from low scarcity value. Like a new car, owners often find the asset has depreciated when they go to sell, with limited demand from buyers due to oversupply.
The value of the land component is another positive for apartments in older-style blocks, which typically include more room for communal areas, gardens and car parking.
Scarcity
Unlike high-rise inner-city apartment blocks with hundreds of owners, fewer units per block means that the nominal land value for each owner is significantly higher.
As land scarcity in prime suburbs escalates, the notional land value surges. Developers are increasingly targeting entire blocks for redevelopment, offering owners premium prices that dwarf the individual sale value of their apartments if sold separately.
Of course, a major factor is the characteristics of the apartment itself. Spacious apartments with several bedrooms can easily be suitable for a family priced out of a house in the area.
As livability expectations have increased, so too has the importance of apartment design and layout, which should ideally include an entrance hall, natural light and balconies.
Having at least one car parking space is important, as is the apartment’s aspect and position within the block itself.
You don’t want to be next to the garbage disposal area or a busy driveway, either on your block or the adjoining one.
Updated
Once you have selected the right apartment, it’s important to make the necessary upgrades. As mentioned, investment grade apartments are typically older buildings constructed as far back as the 19070s.
Most of these can be significantly improved with strategic renovations. Gone are the days of buying an apartment, renting it out, putting it back on the market as-is, and expecting strong capital growth and return on investment.
With apartment living becoming more common and long-term, buyers and renters alike expect a lot more for their dollar. An upgraded bathroom and kitchen, new floor coverings, paint job and window furnishings are worth the initial outlay when it comes time to sell, while generating higher rental returns and quality renters in the interim.
While apartments are clearly overshadowed by houses when it comes to capital growth, it’s important to remember that the property market moves in cycles, and is heavily influenced by demographic and social shifts.
As Australia’s population grows and land in prime areas becomes ever scarcer, it’s a fair bet that high-quality apartments in these same areas will take up the slack and experience an uplift in demand.
So, are apartments currently undervalued? Perhaps. Choosing the right apartment asset now, investing in improvements, and building equity may well provide a much bigger stepping stone towards a house than current expectations suggest.
