The changing face of a good investment property

This may seem obvious, but I have to start with it: in order to create long-term wealth from property it is important to know the type of property that will to be in continuous strong demand in the future.

While many investors think about what will be popular with tenants or the rent they are going to achieve, that’s not what I look for in an investment.

To me a good investment property is one that will always be in strong demand by owner-occupiers. After all, home buyers purchase about 70% of all the properties on the market, and they’re the one who push up property values.

On the other hand, the type of property that is more influenced by investor demand or by tenants tends to be more illiquid and volatile in price.

Don’t believe me? Try selling a property in an inner-city high-rise block, a mining town or student accommodation today and see if you find any buyers.

On the other hand, well-located properties that are popular with owner-occupiers are always in strong demand. This means valuers are happy to put their stamp of approval on them and banks are prepared to lend against them.

This means understanding the needs of our changing markets will be fundamental to success when it comes to securing properties that will attract above-average capital growth in the years ahead. One of the keys to this is to study demographics – that is, the number and composition of our population and how we choose to live in our society.

Interestingly, Australian demographics are undergoing some radical changes at present.

With housing affordability becoming an increasing issue for many first-home buyers and our lifestyle becoming a lot more hectic, we are seeing an increase in the popularity of medium-density apartment living among the younger generations of Australians.

Rather than live in a house with a front and back yard, they’re keen to live close to where they work and play, and they’re happy to swap the back yard for a balcony. Clearly this is very different from the way their parents chose to live.

The fact is, the property investor of the future will be catering for a whole new breed of tenant and buyer.

Think about it…

Gen Y is on the move, as many from this 15-to-24 age group start to think about leaving the family home and starting their own lives independent of mum and dad. In 2010, about 150,000 new households were created in Australia, and approximately 65,000 of these comprised Gen Y singles, groups and couples.

Interestingly, the majority of this younger demographic will be destined to live as tenants for quite some time, stuck on the rental roundabout due to ever-increasing house prices and the cost of living, interest rate uncertainty and of course, annually rising rents. In fact, many won’t buy their first property until they’re in their 30s.

As a result many choose to live in shared accommodation and multi-income households in order to reside in the locations they favour, but could never be able to afford as a home buyer. These include inner-ring suburbs close to our major CBDs, where employment opportunities and a fast-paced lifestyle with plenty of recreation and entertainment facilities are the primary attractions.

With the number of Gen Ys looking for accommodation continuing to rise, rental demand for near-city and inner-suburban apartments will grow significantly in the coming years.

And our old friend the supply and demand equation will ensure that rents for these types of properties keeps rising, as will their values due to scarcity and higher rental yields.

This means that today medium-density properties – apartments and townhouses – make great investments and in general appreciate in value equally, if not more than houses in our capital cities.

Of course this is in part due to affordability, as apartments offer a much more affordable alternative housing option than houses. But it’s about much more than affordability.

Significant changes in our population profile and lifestyle priorities are creating a strong demand for apartment living. Today, our lifestyles are vastly different to those of our parents. We’re working longer, we’re increasingly time poor and we’re starting families much later in life. This means proximity to work, transport, entertainment, cafes, shops and beaches is becoming more important than owning a piece of land.

In Australia’s capital cities, apartments are continuing to improve in design and size and are generally closer to the CBD than affordable houses.

Of course there will always be a demand for houses with a front and back yard, particularly from families with more than one child, yet there is definitely a shift towards apartment living.

And it should be fairly obvious that this trend will continue in the long term.

People are getting married later in life, and apartments suit their busy lifestyles; and when a baby comes along, they will often stay in their apartment or buy a bigger one in the same location.

And don’t forget as baby boomers move into retirement they will also significantly increase the demand for townhouse and apartment living. Low-maintenance, secure “lock and leave” living is a priority for these buyers.

According to a report last year from RP Data, capital city units and apartments only accounted for 25% of all home sales 15 years ago. Today though, medium- and high-density accommodation makes up about 35% of all home sales.

Now that’s an interesting trend, isn’t it?

In our two most densely populated capital cities, RP Data found the proportion of unit sales is significantly larger. For the month of August 2010, Sydney and Melbourne unit sales were at 43% and 37% of all dwelling sales respectively.

So if you’re looking for a great investment property you should seriously consider a well-positioned, established apartment in smaller boutique block with value-add potential through renovations. I’d look for a property with a “twist” - something special or an element of scarcity.

Then hold it as a long-term investment and reap the rewards.

Michael Yardney is the director of Metropole Property Investment Strategists , a best-selling author and one of Australia's leading experts in wealth creation through property. He also writes the Property Investment Update blog.