A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
Less is more
Would you spend $1 million on a one-bedroom apartment? It’s understandable if you would baulk at such a proposition, and perhaps even think it a kind of madness. But there are buyers who are willing. Whilst I witnessed my first home town example only last October in East Melbourne, they aren’t so uncommon now in parts of Sydney.
These prices are only being reached for exceptional assets in our most exclusive suburbs. Although only containing one bedroom, a $1 million apartment will be spacious with wonderful light and views. The architectural style will be classic and the standard of renovation flawless. The unit will sit in the prime position in a small block on a quiet tree-lined street in the bluest of blue-chip suburbs adjacent to (but not in) the CBD.
Even so, would investors be wise to purchase a prestige one-bedroom apartment rather than, say, a 2-bedroom house? Well, I’m afraid a sub-$1 million two-bedroom investment grade house is a thing of the past in Sydney and Melbourne. That budget can only stretch to houses that have compromises – be it the location and/or the house itself – that would depress the asset’s return.
So for sub-$1 million budgets, the focus for investors will be the apartment market. This may be a bit disheartening to some, but it does mean that the apartment market is becoming the main battleground for investors as well as many homebuyers, which ensures an intensity of demand that will underpin future capital growth for the sector. And, thankfully, you won’t need a budget as high as $1 million to participate. Quality assets start from under $500,000.
Those with fewer dollars will inevitably be looking at 1 bedroom units, but as budgets rise, there can come the dilemma of choosing between two properties that are similarly priced but where the number of bedrooms differ. Here, the smart investor’s calculations will be more sophisticated than just counting the number of bedrooms or the square metres of accommodation. It will be about establishing fair value for the assets (by benchmarking them against the sale prices of recently sold comparable properties), tapping into previous sales price data for the properties in question and then working out historic annualised capital growth rates.
You should, of course, pick the apartment with the highest historic capital growth. And if it turns out to be the one bedroom unit, do so with confidence, given ABS data shows that the number of people living alone is projected to increase by over 60% in the 25 years between 2011 and 2036. Many of these will be older – and often affluent – Australians who, when judging accommodation, will value quality over quantity.
By the way, the ‘less is more’ maxim isn’t restricted to number of bedrooms. It also extends to one’s property portfolio. Despite the tendency of some property journalists to celebrate investors who have managed to accumulate a half a dozen properties in what always seems an impossibly short amount of time, it is always better to have a few great investment properties in one’s portfolio than several average ones. Richard Wakelin