Unit Investment Swell Leaves Housing in its Wake

Australian property has the normal ebb and flow of all market-driven sectors where the relative popularity of different locations and property types will wax and wane over time.

A range of drivers come into play helping push one property sector over another. The trick is spotting which type is on the up early enough to secure your investment prior to the rise. While long-term investment is always the preferred strategy, most investors won’t be happy if they acquire an asset only to see its value has softened a few months down the track.

My team at MCG Quantity Surveyors tracks buying activity and sentiment among our clients, and our most recent analysis has revealed one property type’s star is on the rise. For those who can buy the right asset in the ideal location, now might be a prime time to add a unit to your portfolio.

Units make waves

According to our numbers, there has been a material swing toward unit investment in 2023.

Our company surveyed client numbers to identify investor transactions in Q1 2023 and compared that to the numbers for Q1 2022.

The results show that while overall transaction numbers are down in 2023, there has been a proportional shift toward units as a preferred investment vehicle.

The increase is marginal at this stage, but it is a lead indicator that I expect will develop over the next 12 to 24 months.

The other reason I feel bullish about continued unit price growth is that this is exactly what I’m hearing from my associates in the buyers’ agency and property advisory world over recent months too.

The question is… why? Why are units, which some argue don’t traditionally enjoy capital gains at the same rate as detached housing, becoming a go-to for buyers?

Well, there are several reasons which make sense of the move.

Relative affordability

While 2022’s interest rate rises caused the market to take a hit in many centres, property prices remain at historic highs in capital cities and major regionals. According to CoreLogic, since finding a trough in January 2023, their Home Value Index has recovered by 6.6 per cent, and is just 1.3 per cent below its record level in April 2022. Anyone who thinks property prices overall are weak isn’t paying enough attention.

CoreLogic Home Value Index (source: CoreLogic)

As such first-time homebuyers and investors are flocking to those relatively affordable units in central locations. For a fraction of what you’d pay for a detached home, it’s possible to secure a two- or three-bed unit in a great location with plenty of services and facilities on hand.

Tight rental market

There are two advantages to unit investing in relation to the rental markets we’re seeing around the country at present.

Firstly, it’s easy to find a tenant for your unit investment. The right property will achieve an exceptional rent, and the relative gross yields are impressive compared to houses.

The other reason that tight rental markets fuel unit price growth is that we will continue to see more and more tenants looking to buy. Uncertainty about securing a home is pushing them out of the market, and most want a relatively affordable option. Units meet that need, particularly as a large number of these tenants will be used to unit living already.

Rising immigration

For those who haven’t seen the numbers, immigration into our country is currently running at record levels.

We usually see the long-term net migration number at around 200,000 persons per year, however the pandemic recovery has ramped that up considerably.

Treasury projects estimated net overseas migration to reach 400,000 in the year to June, with a forecast for the figure to drop to 315,000 by June 2024. Those numbers are at record highs, however there are some observers who think Treasury has been too conservative. Abul Rizvi, a former deputy secretary at the Immigration Department, has estimated net overseas migration to hit 470,000 in the 12 months to June and will probably record 500,000 in the 12 months to September.

These new arrivals invariably become renters first and foremost, and the majority will look for a reasonably affordable place to rent in like-minded communities. The net outcome is low vacancies and high rental returns helping boost values, particularly in unit markets.

Affordable value-add

Units deliver excellent renovation potential. Unrenovated stock can be bought at a reasonable price and then upgraded for relatively little cost compared to housing. This has become an important factor during this period of high construction costs and rising interest rates.

It’s amazing how much better a unit looks with a new coat of paint and an inexpensive (but still attractive) new kitchen and bathroom fitout. Some buyers will attempt to do the easy stuff themselves, but even when using contractors, an outlay of $15,000 to $20,000 would result in a stunning internal renovation which adds value and rental return.

Locational advantage

“Location! Location! Location!” is one of the most quoted truisms in Australian property investment.

Most peoples – owners and tenants alike – want to live in areas that offer great services and facilities. There’s also the attraction of being within easy commute of a capital city CBD.

Units are traditionally found in these high-service suburbs with excellent walkability. They’re invariably just a moment’s stroll from lifestyle and entertainment options.

Attractive depreciation benefits

Despite what some may mistakenly think, units deliver relatively good depreciation benefits to investors.

While their full potential is only unlocked via a professionally prepared depreciation schedule, there is little doubt that many of these investments can be turned from a gross negative cashflow proposition to a net positive cashflow asset once depreciation has been factored into the calculations.

Units are having a good run, but there’s still plenty of upside to come from what I can determine. For buyers who choose wisely, there can be some great outcomes but, as always, you should rely on qualified professional advice before purchasing.