Apartment VS House – Which is a better investment?

Windows In The Air Or Bricks On The Ground

by Cheryl Lee

A typical question I hear whenever I attend property seminars or when I met up with ready buyers from Asian countries is, “Which is better, apartments or houses?”   They are wrestling with the niggling question of which type of property will deliver a bigger return in the long term.

I came from a country where eighty percent of the population buy apartments to live in or for investment therefore I can completely understand the struggle they are having between buying the type of relatively maintenance free apartment they are familiar with or the bricks and mortar house on a plot of land like they see in Australia.

The rule of property ownership is that the value of real estate is in the land because this is what appreciates.   However it is not exactly the norm if you come from a densely populated city where most people strive to live within 5-10 km of the CBD where land is very scarce.

An apartment in a premium suburb generally has a higher land value than the construction cost which means the land to asset ratio is high and this really drives the price up. Despite this, I believe that the demand for apartments boils down to two main factors: good location and demographics.

There seems to be an obvious shift to more cosmopolitan living where there are a rising number of single or two-person households that don’t want to live in a huge high maintenance four bedroom house in the suburbs but want to be near the CBD close to facilities, entertainment and places of employment. This is especially true in the more densely populated cities like Sydney and Melbourne.   Adelaide may not be there yet but as its landscape starts to catch up with the east over the next decade we should expect to see real changes in what the market wants for Adelaide real estate even for real estate in Adelaide’s south.

The pros and cons of Apartments and Houses

But there are factors that detract from the appeal of apartments.   When you own a strata-titled, or community titled apartment, there is a quarterly fee that you have to pay to cover the general maintenance, insurance of the common amenities and the apartment manager’s fees.   But for houses, you are free to decide when you want to spend money on repairs.

The higher cost of land encourages the construction of apartment blocks because this decreases the land to asset ratio thus making them more affordable.   Each apartment’s share of the high price of the land becomes smaller as the number of apartments increases on a single allotment.

The upside of having a lower land to asset ratio is that most of the value of your investment is in the construction cost which is the thing that can be depreciated to give you a bigger refund at tax time.   We are already seeing a trend in Adelaide toward building townhouses on very small plots of land because of the tax advantage and this leads to higher rental yields.   High rise apartments are the next logical step but one not yet fully embraced here.

Adelaide people still want to keep their feet on the ground not realising how much they have already moved on from the once original concept of the little house with verandahs, a chook shed and veggie patch on a ¼ acre block.

Buying apartments is the norm rather than the exception back in Singapore from where I come. Apartments in a prime location close to transport and shops can have a similar capital growth rate to houses and this trend should follow in any city as its land supply decreases.

Many people from Asia continue to feel that it’s better to own some high priced windows in the air than bricks on the ground.

The more land – the greater potential for the future

All said and done, we can only recommend that if you can afford the well located, as new house on a plot of land then go for it!   The value of your land will only go up and some day you might get a knock on the door from a developer, with a multi-million dollar budget, who wants to build the type of apartment block you were once thinking about.

So maybe you too can become the next instant millionaire.

To find out more please ring Cheryl Lee on 0406 277 701