A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
Villas, townhouses and former warehouses: good investments?
For all the attention given to whether investors are throwing too much money at new apartments, established properties still dominate residential property investment transactions. ABS data consistently shows only around 10 per cent of investment lending is committed to new buildings.
Of course, that is largely a function of the supply of old stock – built up over decades – dwarfing the pipeline of high-rise apartments and fringe suburb housing developments. But it also speaks to the enduring demand by tenants – the investor’s customer – for older-style dwellings.
Most of these funds go into freestanding houses and traditional apartments. But there are a range of other older-style properties out there: namely villa units, townhouses and former warehouses. Are these worth investing in?
Villa units appeared on the cityscape in material volumes in the 1960s. They were ostensibly targeted at downsizing older Australians (even if the term downsizers wasn’t used in the 60s) who didn’t want to – or couldn’t – move to an apartment. There were no stairs, the title still included exclusively-owned land as well as some common property for generous driveways.
Today, villas are often considered by owner-occupiers or investors whose budget might not stretch to a house but who aren’t enamoured by apartments. And it’s true that prices for villas often sit at a sweet spot between that needed for apartments and houses found in the same locale.
Villas are also relatively scarce and aren’t being constructed anymore (at least in established suburbs). Building them worked commercially at a time when land values were much lower. Today, a developer would use the land far more intensively. This comparative scarcity is a positive for investors.
However, villas are often locationally-challenged. They tend to be found in middle suburbs that generally underperform inner suburbs from a capital growth perspective.
A few villas perform well as investments but many more don’t. This great inconsistency makes getting selection right challenging and therefore should only be tackled by experienced investors.
Townhouses are found across our cities, including in prime inner suburbs, often slotted in on streets in pairs on land where a former double-fronted cottage once stood. Two – and sometimes three – storied, they deliver more accommodation for one’s buck than traditional cottages, whilst still bundling in a reasonable amount of land which can be in a high value land area. And there are specimens that are now 30-plus years old, so with a price growth history you can evaluate.
What’s not to like? Well, the land component is less than in a typical single fronted cottage, so more of the investment outlay is devoted to improvements – which depreciate over time – rather than dirt, the engine room of capital growth. This inevitably compromises return. Moreover, townhouses aren’t a scarce resource. They are being built all the time. So even though there is a sizable pool of demand for them, supply continues to grow. And there is also a question of inconsistent quality. Some were built to very high standards but some builders cut corners. Consequently, investment performance varies greatly.
Converted warehouses can be an excellent investment when the asset is found in a funky inner suburb and the conversion is true to common expectation of warehouse living: big rooms with original features such as exposed brick walls and ceiling beams. It’s that blend of industrial heritage and modern open plan living that excites. But the model is broken when developers pack the interior with multiple apartments divided with conventional plasterboard walls. Unfortunately, the latter approach is coming to dominate the sector.
So tread carefully among these ‘alternative’ established property investment types. Old is usually better than new in the property investment space, but some might still be the ruin of you.