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Why One-bedroom Apartments are Better

22 June 2012

David McRae calls one-bedroom apartments “the gold bar investment”. But the Melbourne valuer and buyer’s advocate isn’t simply attracted to one-bedroom units because one- and two-person households are now Australia’s fastest-growing household categories.

“It’s more to do with affordability,” McRae says.

“We do spreadsheets for clients to show them where the dollars are going to flow through the life of the investment. The price is different for a one-bedroom unit and a two-bedroom unit, but the rate of return is the same.”

Future is bright

Andrew Wilson, senior economist with Fairfax-owned Australian Property Monitors, also thinks one-bedroom apartments have a big future. He says there’s a trend to bringing up families in small units and to growing numbers of dual income families. This is firing rental and buying demand for one-bedroom units, as is a growing preference for open-plan living spaces and inner-city lifestyles.

A spreadsheet prepared by McRae Property for its investor clients bears out the cost/value advantages of smaller units. It compares three 1970s one-bedroom apartments in inner Melbourne priced at $450,000 to $500,000 with four two-bedroom units, dating from the Art Deco era to the 1970s, priced at between $550,000 and $800,000.

Despite the price differences, the buyer’s advisory company forecasts annual rate of capital gain growth of 7 per cent for each of the seven flats.

McRae says the lower buy-in costs for one-bedroom units also means they provide a higher rate of return in gross rent, in percentage terms, compared with larger dwellings.

State by state

Nationally, demand for one-bedroom apartments is strongest in Melbourne. Here developers are offering varied floor plans for new one-bedroom and studio units and including more one-bedders in developments.

Older single bedroom units in Melbourne’s inner suburbs are also in high demand because of their scarcity value.

Wilson says there isn’t big demand yet for small units in Brisbane, but Sydney is starting to catch onto one-bedroom units, especially in new developments in Redfern, Waterloo and Botany.

However, Sydney and Melbourne are different unit markets. Sydney buyers will pay multi-million-dollar prices for units with harbour views. Wilson says, in contrast the central business district in Melbourne and the adjoining Southgate and Docklands precincts have yet to become suburban environments.

“There is nothing to draw people there other than the amenity to the CBD, but Sydney has the harbour,” he notes.

The numbers have it

According to the Australian Bureau of Statistics, the number of one-person households will surge to between 3 million and 3.6 million by 2031, a big increase on 2006, when just 1.9 million people lived alone.

The ABS forecasts that couple-only families will overtake the number of couples with children in 2013 or 2014. By 2031, couple-only families are projected to account for up to 60 per cent of all people living in couple relationships.

Yet more than any other factor it is affordability that’s boosting acceptance of small units.

Agents in Melbourne say many buyers are giving up on the idea of acquiring a two-bedroom apartment of 70 square metres to 75 square metres as these can be priced at $600,000 to $650,000, which is more than most first home buyers or investors are willing to pay.

The Oliver Hume Real Estate Group recently assessed 30 new unit projects in Melbourne. It found one-bedroom units had a median size of just 48 square metres, 4 per cent smaller than the typical new unit in 2010. In a sign of changing attitudes, the drop in size for single bedders hasn’t been matched by a decline in the median entry price, which jumped by $17,000 to $387,000.

Stigma dropping

Richard Reed, who lectures on real estate at Deakin University says there is still some cultural resistance to one-bedroom units and a larger premium is paid for two-bedroom units, regardless of household size. “However, this perception is changing and there is increased pressure on affordability,” he says.

McRae says there are few constraints on the supply of new units, which makes an older-style one-bedder a better investment. “The older apartment is consistently in good demand,” he says.

McRae says it’s more important for investors to achieve an escalating rate of capital growth than high rents and a slowly growing capital gain.

He says it is regrettable that most research on capital growth fails to differentiate between new and old apartments.

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