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Big On Size, Small On Investment Returns

Big On Size, Small On Investment Returns
June 16, 2016 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

We’ve probably all heard the debate over investing in a new high rise apartment with all the mod-cons versus small complexes with lower body corporate fees – which is the better investment? As is often the case with property-related matters, rarely are such opinions supported by anything tangible. A few years back, Propertyology conducted an independent study using historical data and concluded that apartments located within large-scale complexes produced inferior price growth than apartments in smaller complexes.

Findings From The Study

Propertyology calculated the average annual price growth of over 300 individual (randomly selected) Brisbane apartments which had been held for a similar period of time between year 2000 and 2010.

We compared each result to the Brisbane median over the same period of time. The outcome was conclusive – none of the apartments in large complexes produced price growth which was equal to or better than the Brisbane median over that same period. Conversely, 50% of the apartments in small-medium complexes achieved price growth equal to or better than the median.

Our study was conducted from apartments across twenty-four different Brisbane suburbs with an equal number of apartments in large complexes and small-medium complexes to make it a balanced assessment. Many of the apartments with the lowest annual price growth were located in the biggest complexes. Apartments in the middle of the CBD, where large complexes are most prominent, generally performed poorly compared to the broader market.

Our research project concluded that apartments in large complexes produced an average price growth of 6% per annum compared to 9.4% for apartments in small-medium complexes. On a $450,000 apartment, the 3.4% per annum price growth difference equates to $160,000 over 10 years. That’s $160,000 that the owner could add to his/her bottom-line if they invested more wisely.

Interestingly, there was no obvious trend of apartments in particular suburbs being absolute stand outs. The study found instances where some properties performed below the City’s average while others in the same suburb performed well above the average. These variations support our general views that suburb ‘hot spots’ are a myth. A property is a static product (they don’t grow) and a suburb is little more than an arbitrary line on a map.

The data from the study made it reasonable for us to conclude that complexes with large volumes of apartments experience lower price growth than apartments in smaller complexes. Propertyology expects the conclusion to be the same regardless of the specific city or town or the study time period.

Explanations For The Results

The push by governments for higher density housing through bigger apartment complexes is part of their solution to address increased demands on infrastructure as populations grow, especially in Australia’s bigger cities.

Australia continues to build more new dwellings each year than ever before and the ratio of attached dwellings is increasing with it. During the 2006 calendar year, 30% of all buildings approved in Australia were attached dwellings; fast forward ten years and this ratio has increased to 50%.

As city councils throughout Australia progressively adjust zoning to allow higher density, it makes perfect financial sense for developers to squeeze as many individual dwellings as they can out of their land footprint. The traditional six-pack apartment block is now dwarfed by the fifty-six story monstrosity. So, the findings from this study become increasingly more relevant for property investors.

In Propertyology’s view, the main reason for the obvious discrepancy in price growth between large and small-medium complexes is due to how properties are valued. With residential property valuations, the most common valuation method involves comparing a property to something of similar size and quality, in a similar location, which has recently been sold. And, the bigger the apartment complex the more likely it becomes that comparative sales are located within that same building.

Conversely, if the apartment is in a smaller complex property valuers (and buyers in general) will have to cast the net wider to find comparative property sales. However, when an exercise like this is undertaken there are more variables introduced in to the equation (the age of the complex, street location, outlook, number of rooms, etc). The variables from complex to complex are greater than from apartment to apartment within the same complex. These same variables increase the potential for real estate agents to get a higher price for their vendors.
The almost daily reporting of multi-million dollar claims against property developers for costly repairs as a result of developer short-cuts has created an unwanted stigma on newer properties, many of which are large complexes. Higher body corporate fees and more neighbours to have disputes with are other considerations which steer some buyers away from the monstrosity and towards the smaller complex.

How Good Is Your Mathematics?

The era between 2000 and 2010 was a generally strong one for most Australian property markets so the end sale price of all of the apartments in our study was considerably higher than the vendor’s initial purchase price. The reality however, is that very few of these vendors would really know how well their property performed against the rest of the market. The real measure of investment return is a percentage calculation, as opposed to a dollar calculation.

For example, one of the apartments in the study was purchased in 2002 for $379,000 and sold 6.2 years later for $530,000. The $151,000 gain is certainly nothing to sneeze at – gotta love property! However, the Greater-Brisbane apartment market grew by an average of 11.7% per annum over this 6.2 year period compared to the 5.6% annual growth for this particular apartment. Would you not agree that this property under-performed?

To put these numbers in to greater context, if they used the same $379,000 to invest for the same period and time and the property increased in value in line with the broader market growth rate of 11.7%, the end value 6.2 years later would have been $755,000 (a gain of $376,000 instead of $151,000).