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Real estate warning: Steer clear of inner-city apartments

A man walking past a sign advertising apartments for sale
The allure of inner-city living is waning. (Source: Getty)

Australia’s cities as we know them are radically changing.

Due to the ease and popularity of working from home, living in a city centre is slowly losing status.

Inner-city-apartment living was a rising trend before COVID-19 hit us. In fact, for many, living in the inner-city sounded perfect, particularly for those who valued location over space.

However, one of the significant impacts of COVID-19 has been the move of urban apartment dwellers to the middle or outer ring areas where they can buy or rent relatively cheaply.

This has led to significant vacancies in our capital city high-rise towers and a significant decrease in demand by both owner-occupiers and tenants, and this is unlikely to change anytime soon.

Of course, things should improve when our international borders reopen.

But it’s not just COVID city lockdowns that have resulted in CBD apartments dropping in both popularity and value – although the global pandemic certainly hasn’t helped this issue.

The larger issue is that many of the high-rise towers constructed in the past 15 years were built with little thought as to quality of structure. Many had poor floor plans and a large percentage were designed with overseas investors in mind.

Where to next for apartments?

That’s an interesting question because not all apartments are the same.

Some will make great investments, increasing in value substantially over the long term, but many of the high-rise towers built in the past 15 years will continue to underperform with poor, if any, capital growth in the foreseeable future.

Of course, these Legoland apartment blocks never made good investments. They offered little scarcity and had no owner-occupier appeal.

A worker holding a stop sign in front of an apartment block under construction. (Source: Getty)
Many apartments built in the past 15 years were designed with overseas investors in mind. (Source: Getty)

Worse still, because of the high developer margins and marketing costs, many investors paid too much to start with and have since found that, on completion, their properties were worth considerably less than their contract price.

The sad reality for these investors is that today, in light of the many media reports of structural problems in some of these high-rise towers, there is a crisis of confidence. Apartment owners are concerned about what unknown issues and liabilities may lie ahead for them, and potential purchasers are holding back, not wanting to buy themselves future problems.

Inner-city apartments built in the past decade or two may be difficult to on-sell, even though overall apartment demand from both younger and older generations is set to increase.

It’s unlikely investors will be keen to buy them because established apartments don’t carry the same tax benefits that attract many investors to new CBD dwellings.

The fact is, while Australia is currently enjoying a property boom, houses rather than apartments, are enjoying strong demand.

In fact, Australian housing values have skyrocketed upwards at their highest annual pace since June 1989, soaring by 20.3 per cent in the past year alone.

This trend, along with lagging apartment values, has been unmistakable throughout COVID.

Meanwhile, there has been a massive deterioration of rent values in inner-city apartment markets since March 2020.

According to CoreLogic, median asking rents dropped by 14.5 per cent in Sydney and fell even further in heavily locked-down Melbourne, which experienced a fall of 18.9 per cent in the first half of this year.

Do falling prices mean now is a good time to buy?

I can understand why currently some investors and first home buyers are wondering.

It’s a Catch-22 outcome.

The gap between the price of inner-city apartments and houses is only widening, so does this mean apartments are now a viable investment alternative?

I know many first-home buyers and investors are certainly wondering whether it’s time to get into the apartment market despite, or because of, the falling values.

In almost all instances the simple answer is no.

I would warn prospective buyers to steer clear because while many inner-city apartments might initially appear good value, their older low-rise cousins in the inner and middle-ring suburbs boast far better long-term value.

Remember, price is what you pay, and value is what you get.

So, what now for prospective investors and buyers?

The prospect of future capital growth and rental growth in CBD apartments is poor.

I recommend you consider family-friendly, low-rise, and good-quality apartments in popular lifestyle suburbs, which have continued to perform well despite COVID and are likely to see a strong resurgence in values.

These apartments will give you the strong capital growth you will need to climb up the property ladder.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia's leading experts in wealth creation through property and writes the Property Update blog and hosts the popular Michael Yardney Podcast.

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