Location, location, location. If that’s all it took to make a successful investment, our job would be far easier. What’s often missed in the discussion is an emphasis on the right property for that location.
What makes a property the ‘right’ property?
- Type: This one’s easy. Your role as an investor is to select an asset with the highest demand for a given location. This has the effect of limiting rental vacancies and maximising the opportunity for growth. From a practical perspective, as average household size increases, as it does the further you are from a city centre, so too should the size of the dwelling in which you invest
- Design: The average annual growth rate for Sydney City studio apartment (under 50 square metres) over the decade to 2015 was 3.3%. The figure for one bedroom apartments (above 50 square metres) was 5.6% per annum over the same period. Had you invested in a $400,000 one bedroom apartment in 2005 you’d have an additional $156,000 capital gain to what you would have earned on a studio of the same price!
- Size: Dwelling size has implications beyond liveability. A number of financial intuitions limit the extent to which they provide funding for dwellings below 50 square metres. The most significant of these is a reduction in loan to valuation ratios meaning you’ll likely have to save a larger deposit
- Value: Price is what you pay, value is what you get. The ‘right’ property is one that minimises the risk of price exceeding value
Case Study – Melbourne Apartments
Based on a sample of 10,373 apartments that are currently either being marketed or constructed, 4,428 (or about 43%) are one bedroom apartments, most of which (72%) are between 41 and 50 square metres (Charter Keck Cramer report for the Department of Environment, Land, Water and Planning). Two bedroom apartments make up 52% of apartments currently being marketed or constructed. Of these, 10% are 55 square metres or less; 61% are between 56 and 70 square metres; and 29% are 71 square metres or larger.
Our research driven guidelines, broadly speaking, limit approval to one bedroom dwellings in excess of 50 square metres and two bedroom dwellings in excess of 70 square metres. Less than one third of Melbourne apartments fit this criteria, highlighting the scarcity of the product type.
Investing on location without consideration of the right property is, according to Neriman in our office, like dating a guy based on their looks without considering their personality. Confucius couldn’t have said it better himself.