Are units a better bet than houses for property investors?

Analysts suggest the humble property unit could beat stand-alone homes over the next decade – a change that would challenge a guiding principle of property investment.

The residential property market looks set to undergo one of the biggest shifts in more than a decade: apartments are forecast to outperform stand-alone homes. It’s a trend that runs against all property principles but our post- pandemic landscape is ready to reveal surprise profits for those thinking small.

The assumption that home prices will always outperform units is a bedrock of the investment market – it’s based on the concept that land value is maximised in a house.

It’s always been true and never more so than during the pandemic upswing when house prices rose more than twice as fast as unit prices. (A unit is anything other than a stand-alone home – typically apartments and townhouses.) Now stand-alone houses are set for a post-Covid hangover and units which are already better value are showing better prospects.

What’s the evidence? The big change is found in a simple metric: for many years, pre-pandemic, the gap between the average unit price and the average home price was steady at nearly 8 per cent.

Today it sits more than three times higher at 28 per cent.

As the head of research at specialist property group CoreLogic puts it: “Underlying land value has been the core issue for many years but units might have a decent headstart over the next 10 years – there is a wider than average value gap with homes just now and the biggest factor is that we have undersupply across the high-density sector.”

It might be hard to believe when you glance at the cranes dotting the skyline as apartment projects rise across major cities, but the looming problem is the weak level of approvals, suggesting the supply of units coming down the line will be 40 per cent less than a decade ago.

In fact, the government’s National Housing and Investments Corporation spelled it out in a recent report: “NHFIC continues to expect a shortage of apartments and multidensity dwellings for rent over the medium term. Net additions of apartments and medium-density dwellings such as townhouses are projected to be around 57,000 a year (on average) over the five years to 2026-27, around 40 per cent less than the levels seen in the late 2010s.”

This undersupply of apartments and townhouses will arrive just in time for an upsurge in demand as immigration levels return to record numbers and household formation trends reverse with adult children moving from their parents’ suburban homes to look for rentals in the inner city.

For renters or first home buyers the distinct prospect of apartments outperforming stand-alone homes is not good news, but for investors the opposite is the case: units can be purchased as an entry level step into the property investment market.

In addition to sidestepping the much higher maintenance demands of stand-alone homes, investors can also take confidence in the outlook for rental growth: With investors across the spectrum looking for inflation-proof income, property rental income is set for an extended period of growth.

Property researchers suggest capital city unit rentals grew by a 16.5 per cent over the last year – a pace more than twice the annualised inflation rate: “The continued shortage in rental unit listings and strong demand from international students and workers returning to the city will likely see capital city unit rents continue to increase at well above the average rate seen over the last decade,” said Kaytlin Ezzy in a recent CoreLogic report.

And what was the average monthly rate of rent increase over the last decade? 0.2 per cent. No wonder the analysts believe it‘s going to get better for the unit market.

Originally published as Are units a better bet than houses for property investors?