Homework guide for investors

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INVESTORS should first understand their own needs and goals, experts say. After that, when it comes to choosing an apartment, research is key.

6 September 2014
The Australian
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The downside of greater choice is the need for buyers to do more research

INVESTORS should first understand their own needs and goals, experts say. After that, when it comes to choosing an apartment, research is key.

Location remains crucial, with investors encouraged to look in areas that could be undersupplied.

Neil Smoli, managing director of Aviate Group, which links investors to apartment projects, recommends being wary of areas with the “hotspot” tag, unless one is playing the long game.

“Once a market is labelled a hotspot, the best investment prospects are usually gone,” he says.

“Vendors in these markets have likely realised they can put a premium on their asking price. Paying too much for an apartment means an investor jeopardises their yield and exposes them to negative equity risk.” Investors are also advised to avoid expensive facilities that could increase costs and cut returns.

Angie Zigomanis, senior manager of residential property at BIS Shrapnel, says apartments are fairly conservative investments and less volatile than shares. They can also generate both rental income and capital growth. Tax deductions may be available for new apartments.

He says investors could prefer apartments to houses because “it’s more of a set-and-forget type investment”. If a tenant leaves a rental house, for example, the landlord has to tidy the garden to make it more attractive, while a building corporation takes care of apartment amenities.

Aviate’s Smoli emphasises research. “From the broader macroeconomic environment down to the finest details of the apartment itself, the depth of research and range of investment criteria that investors should consider prior to purchasing an investment property is extensive,” he says. It is also important that each investor know their own goals. Smoli says investors need to take into account their own means, traits and objectives. “What makes for a successful investment apartment for one investor might be too difficult for another investor to hold,” he says.

Smoli says Aviate monitors individual suburban markets on a national basis, analysing current and future stock, demographic characteristics and shifts, new supply under construction, approved and in the planning phase, and a raft of other data. For each apartment, it evaluates 32 investment criteria for its investors.

“Each must be considered in the context of the individual property and the other influences at play,” he says.

“For instance, when weighing up the impact of new supply on a suburban property market, it’s important to consider current and future demand, existing and future infrastructure and the current and future state of amenity, just to begin with.

“The investor can then determine if the market is moving into oversupply, which can expose them to vacancy risk, or whether there are still good investment opportunities available.” Still, Smoli says when it comes to buying , there is no definitive rule. “The nature of property means that no two apartments are the same,” he says. Capital appreciation is just as important as rental return, so the apartment must be able to deliver both.

“This requires sustained demand from quality tenants, those ideally employed in a professional capacity with high incomes and job security,” he says.

Smoli says Aviate prefers inner-suburban markets close to major employment nodes.

“Breaking it down further, boutique apartment developments in near-CBD locations close to infrastructure, retail and recreational amenities are typically better suited to investors,” he says.

He advises caution towards holiday towns because of many more variables including seasonal demand. Smoli also suggests scepticism towards some high-density projects, depending on location and levels of owner-occupation. “Apartments in a high-density tower not only compete with each other for tenants, they compete with each other when it comes time to sell,” he says.

Zigomanis also says ideally investors want to buy in a location that does not have a lot of competing apartments. They also want some level of geographic distinction such as a park, beach or other outlook.

Zigomanis reminds investors that services and facilities such as gyms, swimming pools and concierges contribute to body corporate fees.

When it comes to size, Smoli says the best investment apartments are typically one bedroom, one bedroom plus study, or two bedrooms. “Studios often fail to attract the best calibre of tenants and generally have a limited resell market,” he says. “Three-bedroom apartments are often too arduous for the investor to hold.”Zigomanis prefers fairly open-plan apartments with lots of natural light and spacious rooms. High ceilings “give a sense of space and make it more attractive emotionally for someone who is looking at it”.