Unloved apartments ready to join the property rebound

Residential apartments – the poor cousins in the investment property market – may have finally turned the corner, with the work from home movement underpinning a delayed rebound.

The work from home movement is underpinning a move towards larger apartments with traditional one-bedroom flats often struggling to keep pace. Picture: Darren Leigh Roberts

Residential apartments – the poor cousins in the investment property market – may have finally turned the corner as bigger units lead a rebound.

Unit prices – and rentals – are lifting in a delayed response to the best housing market for years.

But any potential rebound is expected to look quite different to the pre-pandemic scenario:

Apartment buyers are looking for units outside the student-heavy CDB districts of Sydney and Melbourne.

Moreover, the work from home movement is underpinning a move towards larger apartments with traditional one-bedroom flats often struggling to keep pace.

Offers over $1m were sought for this apartment in the North Queensland city of Cairns in June. Picture: Supplied

A new report from BIS Oxford Economics, which is among the most bullish to hit the market in recent months, says the apartment market has “passed the trough” brought on by tight credit and the onset of the pandemic

The report says the average apartment size increased by 15 per cent over the last year: Meanwhile, the latest sales figures show three-bedroom apartments are the strongest unit category at present.

Low interest rates, price gains and government incentives are put forward as key factors in a sector where “risk is tilted to the upside”.

“Apartments have some catching up to do – if we get to a period where lockdowns are behind us I would not be surprised to see apartments outperform houses in the future,” says Louis Christopher of SQM.

Certainly, the numbers are moving in the right direction – national unit prices are up about 7 per cent over the last year – a reasonable improvement though still less than half as strong as residential house prices which are up 15.5 per cent over the same period.

Meanwhile, rental prices across the market have lifted more than 13 per cent – the fastest move in half a century.

“I would be careful, the apartment market is seeing better numbers but location remains crucial and the inner city zones around universities are to be treated with caution,” says Alan Oster chief economist at NAB.

The bank is forecasting the jump in dwelling prices this year – which is expected to reach close to reach 19 per cent – will be followed by a much milder appreciation in 2022 where prices may lift by only 4 per cent cent.

However, the Oxford Economics report highlight two strong indicators in the apartment market. Apartments may well benefit from a range of key infrastructure projects set to open across the nation in the months ahead including Sydney Metro (stage 2) Melbourne’s Metro tunnel and Brisbane’s Cross River Rail.

For investors the report also notes that apartments have managed to outpace other income investments such as bonds or bank deposits.

According to the report author, Maree Kilroy: “National gross rental yields have held between 4 and 5 per cent while Term deposits and treasury bond returns have dipped below 2 per cent a year. The yield premium accruing to units have never been this high “.

Investors will most likely want to see a complete rebound in apartment prices and rentals before entering the fray with the enthusiasm seen in the last cycle which ended after lending restrictions came into force in 2016.

So far this year prices have moved higher across the unit market but the rental outlook is still mixed.

Rental growth has been strongest outside the Sydney and Melbourne centres, with Perth for example showing a 15 per cent lift in rentals inside the year. In contrast Melbourne rentals went backwards with the city revealing a minus 5 per cent unit rental change over the 12 months to June 30.

Christopher at SQM also says apartment prices have the capacity to mirror the run up we have seen in house prices but he believes the current trend for bigger apartments may not last, especially since smaller units are more profitable per square metre for developers.

Originally published as Unloved apartments ready to join the property rebound