Q&A: Which apartments should you invest in?

Amid all the talk about the oversupply of apartments, particularly in Melbourne and Brisbane, potential buyers really need to do their homework before purchasing an apartment.

Buyers’ advocate Cate Bakos spoke to us about which units typically retain the greatest value and what design features or amenities buyers should look out for.

Why are regulators worried about new apartments?

The Reserve Bank of Australia and the Australian Prudential Regulatory Authority have both expressed concerns over the number of new apartment buildings in both Melbourne and Brisbane, says Bakos.

“We’ve got an oversupply of new and off-the-plan, if we had a stronger blend of established properties (in those areas), regulators may not be quite as concerned. But regulators are worried about off-the-plan for a few reasons. Obviously having a longer range settlement means that the buyer is taking a risk, so the risk is if the market contracts or the market changes they may have a valuation shortfall.

“Also, lenders may find that they are exposed to a high number of apartments in a certain building or a certain area – so there’s a concern there, they don’t want to be exposed to or vulnerable to specific pockets or segments of the market. Also, some of those new apartments in both cities have particularly small floor plans, it’s counter to what the majority of the market wants and it’s counter to what the banks want,” she says.

Should buyers avoid all new apartments?

Bakos says buyers need to be aware of how big the pool of potential buyers for an apartment is as this will have an impact when it comes time to sell.

“Buyers should understand the risks with new apartments and they should be very, very cautious about buying anything that a mainstream lender won’t be excited about financing,” she says.

How would a buyer assess a unit’s relative scarcity?

Buyers can also check with the local council to see what plans developers may have submitted for yet to be built nearby apartment complexes as a way of assessing the relative scarcity the unit which is important, Bakos says.

“It’s a great idea to see what’s been approved and what could be rolling out, but it’s no guarantee that the project will go ahead,” she says.

“The scarcity component is what has been threatened of late with apartments because there are many of them and all the newish ones are quite similar.”

Do certain architectural styles retain greater value?

Size and design do matter when it comes to purchasing an apartment, says Bakos, who warns that properties with less than 50sqm of internal space are likely to face financing issues as lenders will consider these units to be too risky.

“There’s two things that physically help an apartment retain value. First is if there is a boutique number in the block, that is the relative land component that each owner owns is greater than if it’s a high-density tall building.

“Secondly, architectural style and era plays a huge part, people obviously love Art Deco or New York-style loft apartments. So there are styles which hold value and outperform the apartment market,” she says.

Is it easy to renovate and add value to an apartment?

Older apartments are often larger yet outdated, but Bakos warns owners do face unique challenges when renovating such as getting permission from the owner’s corporation or strata corporation.

“The permission to renovate is really vital … it might involve getting a structural engineer on site. For any significant internal resurface with the walls being moved, this absolutely needs to be scoped out before someone sees if they can do it,” she says.

What are the main risk factors buyers need to consider?

Apartment buyers should look at the property’s title, zoning and outgoings before they sign on the dotted line as certain lenders can be wary of things like the title type, says Bakos.

“If your property really does seem too good to be true, you really do need to get some legal advice about the contract, as it will be evident in the contract if it’s a varied title type,” she says.

Apartments built on land that isn’t zoned as purely residential is also considered risky by some lenders and buyers should look into the building’s outgoings – that is the owner’s corporation or strata fees – which can vary greatly.