You don’t have to look very far to see advertisements for new High rise apartment buildings. They are in newspapers, magazines, on radio and TV. Everywhere it seems there are new apartments for sale. I thought it would be a good idea to look at what’s behind the glossy brochures and ask a simple question from an investors point of view.
Why are they building so many apartments?
All the statistics available point to the fact that there is a looming oversupply of apartments in capital cities. The Banks reaction has been to contain lending levels in these areas by reducing the LVR’s available to specific postcodes.
The upshot to having lower LVR’s is that the investor is forced to use more of their own money to complete the purchase. Given that investing in Property is about using less of your own money, is it reasonable to purchase something that requires more of your own money than other property types? After all, an LVR is really just an indication of how confident the Banks are in a certain postcodes.
Generally, these LVR restrictions are driven by a current, or perceived, surplus of stock. You see, Banks rely on the property being sold quickly in the event of a forced sale to support their liquidity. Too many vacant apartments would impact the turnaround times and tie up money that could be lent out again. Lower LVR’s simply reveal that the Banks are worried about getting their money back in the event they have to sell someone up.
Surely, if the Banks are worried about these properties values, shouldn’t you be too?
For an investor though, if you buy an apartment, the size will be crucial in attracting your tenants. The pool of potential tenants is limited and this is the exact opposite of what a property investor is looking for.
If we are truly honest we should accept that the high-rise apartment is really built only for profit, not to alleviate the housing shortage. Developers are a business after all and their profit is measured by numbers of sales, not whether the product is relevant. The other most obvious reason is that there are no vast tracts of land available in the CBD. Clearly, the only way to fit more in is to go up.
To me, there seems to be a mismatch between what type of housing is urgently needed and what creates the most profit for developers. Most Australians want a House with Land yet the numbers are way behind for this product. We could be cynical and propose that the time it takes to build a house is a lot longer than the time it takes to build the equivalent apartment. The old saying about time equals money might be at play here?
Adding to the dilemma is the fact that building more houses requires more space to fit them into. That’s why suburbs spread out from the continued demand as more and more people move in. There is also no question about demand either as none of the newer suburbs have a high number of unoccupied houses.
For an investor, property selection is always supported by the fundamentals.
Any prospective purchase should be subject to a Value Criteria to confirm an upside. Potential purchases should meet Lenders Criteria and have high LVR capability, not to borrow to that level, but to confirm that the Lenders see the same demographics as we do. Obviously this is not the only fundamental to use but these will give you an idea of how critical it is to investigate in depth.
It’s important to realise that not all suburbs have the same upside and the makeup of the people living there is going to affect the result. Clearly there is going to be more to property selection than the few points I’ve described here and while it’s good to do your research you can also engage a professional to help you.
When it comes down to it, there is really only one way of approaching the Houses versus Apartments issue. While it’s clear that each lender has very similar rules around lending to apartments and lending to houses, from a finance point of view, the answer to which is best leads us to another question altogether.
Whose money would you rather use to build your wealth?