Small apartments set for a big future

Recent reports reveal that Australia has overtaken the US as titleholder for “home to the world’s largest houses”.

Large ‘McMansions’ on expansive suburban blocks have long been held up as the ‘Great Australian Dream’ ideal, while smaller inner city apartments copped a pretty bad rap as the cheap and nasty end of the property market.

However, times are changing, with many home buyers and tenants forced to reflect on whether their priority is square footage and a big backyard in the burbs or getting into a property without breaking the budget.

Suddenly, that one bedroom apartment seems a lot more appealing.

Whilst many developed countries have embraced the virtues of high-density accommodation clustered around major cities – think New York, Paris, London and Tokyo. Here in Australia, our culture has been based on backyards, BBQs and wide-open family spaces.

Now though, a demographic shift is occurring, with more single person households and childless couples choosing to live in and around our big cities where employment and lifestyle factors are big drawcards.

Figures from the Australian Bureau of Statistics (ABS) reveal that the number of one person households will surge to between three million and 3.6 million by 2031; a dramatic shift when you consider that in 2006 only 1.9 million people lived alone.

This massive increase is due to a number of factors, including:

• Gen X downsizing as their children grow up and leave the family home.
• A forecast jump in the number of DINKS (Double Income No Kids). According to the ABS, couple-only households are set to overtake the number of families with offspring in the next two or three years, and it’s expected that DINKS will make up 60% of all couple-only households by 2031.
• A rapidly growing population and continuing housing shortage in some of our major cities.
• Ongoing affordability issues and increasing rental prices forcing many to rethink their size requirements.

Demand for one bedroom apartments, which skeptics have long considered to be less desirable, is set to soar as many Australians adjust their ideals according to what they can afford. And one of the questions they’ll be asking is: Do I really need that extra bedroom?

In the past, singles and couples have, by and large, sought out two bedroom apartments with the perception that they offer larger living spaces and the convenience of extra storage.

However, with median price tags for such real estate heading upwards of $500,000 and rents soaring over $500 per week in many desirable locations, the affordability barrier is encouraging many tenants, investors and home buyers to accept one bedroom units as a viable alternative.

Recognising this growing trend, developers are jumping on the bandwagon and including more one bedroom units in their large scale projects. But be wary – the price of many of these new apartments is going up as their size is going down.

So do one bedroom apartments make good, affordable investments?

Is there enough ongoing future demand from tenants and owner occupiers alike to ensure they perform as long-term cash cows?

The simple answer is – yes!

Why?

Because affordability means more owner-occupier buyers will be pushed into this type of real estate as they sacrifice size for location, thereby increasing demand and placing upward pressure on prices.

These apartments are often located closer to the city and major work nodes as well as universities and hospitals, in areas that generally have efficient transport connections, plenty of retail facilities and social amenity; all key elements high on the list of young buyers.

In addition, tenants seeking rental accommodation in and around desirable lifestyle locations will look for affordable one bedroom alternatives, meaning investors will have a large tenant pool to help pay the mortgage.

Sure, one bedroom accommodation caters to a narrow demographic of one and two-person households, but the reality is this is a mismatch of the demand from this growing demographic and the relatively restricted supply of established one bedroom apartments that are “investment grade” properties.

I have to say that some of my best performing investments over the last few years have been one bedroom apartments. They attract a diverse range of tenants, including Gen Y making the break from mum and dad; young professional couples, middle-aged singles as well as downsizing baby boomers.

A few words of warning:

• Small spaces can either be highly functional or incredibly pokey, meaning the design and layout of your apartment is critical.
• Avoid studio apartments. They are too small, the banks don’t like them and they are very hard to on sell. Instead, go for something that offers at least 50 square metres of indoor space and if you can manage a balcony and plenty of clever storage options, all the better. Off-street parking is a desired bonus, but not necessarily required if close to transport.
• Steer clear of new and off-the-plan developments, especially in the CBDs of our major capital cities. Especially in Melbourne, where there is a huge oversupply and Brisbane with a potential oversupply problem.

Also, avoid the large generic developments sold off the plan in the center of major cities. While these might seem shiny and new, they quickly lose their lustre when people realise they lack character and the timeless appeal that puts property in continuous strong demand. Usually the majority of buyers in these soulless complexes are investors, while owner occupiers – the true driving force behind real estate values – tend to stay well away in preference of something more established or in a boutique block.

So next time you’re shopping for an investment remember that it’s not the size of the property that counts, it’s the size of the profit you’ll realise at the end of the day!

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. A best-selling author and one of Australia’s leading experts in wealth creation through property, he also writes the Property Update blog.