The Evolution of Apartment Markets
Property markets are never static, like almost all other sectors, the apartment market is always evolving and adapting to new forces.
However, we currently have a combination of factors that are re-shaping the market beyond mere fashion or temporary changes impacting supply and demand. These factors include a diminished or at least more complex role for investors, a surge in demand from owner-occupiers and the inevitable wide spread development of build-to-rent projects.
While there are other factors, these three are, in combination set to change how individual apartments and projects might look like in the immediate future. All three are intertwined with finance, shifting demographics across our major cities, linked to design trends and government planning regulations.
Investors Lose Poll Position
For a variety of reasons, chiefly, the ready access to finance and favourable taxation policy, investors were until recently driving demand in the apartment market.
Finance played a key role in the form of low interest rates, the popularity of self-managed superannuation funds allied with the disincentive to invest in conservative options including fixed interest deposits.
Taxation policy also favoured investors with reduced capital gains, attractive depreciation allowances and negative gearing. While these policies are still largely intact, they have attracted the spotlight as areas of possible policy change, and this has unsettled some investors.
However, it’s been the impact of much tighter finance options that has basically eroded the presence of investors in the market and in particular offshore investors who now also face increased and additional charges and taxes.
Developers have also over recent years responded to investor demand by producing apartment projects that had greater appeal among investors, than owner-occupiers. This is not to suggest any sort of substandard product, as tenants still demand a level of quality to justify market rents. Nonetheless investors were driving the character and product standards of many projects, and trend that is now changing in favour of owner-occupiers.
Investment product does not always satisfy the longer-term needs and aspirations of owner-occupiers and what we are now seeing is more design innovation with an owner-occupier focus.
This focus is impacting developments in a number of ways, including a shift to larger apartments that have appeal to families, with many more 2 and 3-bedroom apartments that offer greater flexibility and in particular larger living areas.
In some developments, this has seen a trend where a family will buy several adjoining apartments to accommodate their lifestyle aspirations.
As buyers are often paying high prices on par with median house prices, this demand is driving a transformation in quality, as apartments evolve into long-term family homes.
Some general design ‘must-haves’ for this market include; individual entrance foyers, a guest or easily accessible bathroom, ample storage both internally and additional basement/external storage, good size bedrooms, eat-in kitchens and covered private balcony spaces.
Demand from owner-occupiers is also impacting the extent and character of communal facilities, for example and favouring thoughtfully designed rooftop and courtyard gardens that feature edible veggie patches and captured water supplies.
The Popularity of Mixed-use
As the market shifts to a greater emphasis on owner-occupiers the appeal of mixed-use or integrated developments has been noticeable.
These developments are also changing to reflect wider demographic trends including an ability to age in-place and with work options closer to home and transport connections.
Mixed-use no longer simply means just adding a few shops or commercial space at ground level, today it’s a more holistic design approach that can include hotels, serviced apartments, aged care, shared work environments, alongside retail and childcare.
Such developments are also increasingly popular outside core CBD and inner-city areas and so they are spreading to regional centres that are 20 or 30 kilometres from the CBD.
Mixed-use developments can also help deliver key shared services to residents including a concierge which, in smaller developments might not be justified but when combined with an element of serviced apartments is affordable.
Buyer preferences, including among families and older buyers, and the wider spread of apartment living right across our cities, is also leading to some reassessment of the scale of buildings.
This is in part a reflection of more families moving to apartments as a long-term home, but also mirrors the reduced demand for extensive investment stock.
The shift away from an emphasis tower developments is also important for build to rent projects, by fostering the choice of projects on a more economic scale.
We already have many high-rise buildings in CBD locations in Sydney, Brisbane but in particular in Melbourne.
When looking at Sydney for example there are some high-rise projects located in diverse centres up to 40 kilometres from the CBD.
There are more of these buildings planned and often associated with existing and new transport links, like the Sydney Metro. However, the lead time for these large projects is extensive and often drawn out because of complex planning regulations.
Buyer demand has now shifted to buildings and projects that are on a more human scale, with a greater connection to ground-level activities.
Build to Rent Starts to Gain Traction
The housing option of build to rent is still an emerging part of the Australian residential market, but is set to grow. With build to rent projects the big difference is that the investment model will shift away from individuals, if you like mum & dad investors to institutional investors.
With build to rent the investment is many times bigger and is usually held by a single commercial entity and this creates the need for varied financial models.
However, as affordability will remain a central issue and as more individual private investors shy away, this sector will take on increased importance. In some markets, there will potentially more urgency if the traditional supply of rental apartments, owned and funded by individuals, starts to dry up, driving down supply and increasing rents.
A Mature Market
Demographic change, like market forces, is also always dynamic and the local apartment market is naturally responding, and this requires continued innovation.
That innovation needs to accommodate the maturity of the apartment market and requires a response from developers, planners and financiers.
Several state governments have introduced minimum design standards for apartments and medium density developments. Seen as a response to the rapid spread of apartment living over the past 5-10 years, some of these standards are now being questioned as possibly stifling design innovation. This may not be the most desirable outcome as demand shifts and as greater numbers of people move to apartment living in very concentrated urban environments.
The variety and richness apparent in our demographics needs to be reflected in the quality and variety of individual apartments and development projects.