Down low can be the way to go: Ground floor apartments and units could be a good investment
For most investors who focus on units and apartments, buying on the ground floor long time been a property industry taboo. Experts and successful investors historically have insisted on avoided the ground floor for a plethora of reasons. This sentiment was then reflected and evidenced in the market via property values. Take your stock-standard, older style, three-floor walk-up unit block without a lift.
For the past fifty years or more, you could almost guarantee that that the top floor units would achieve the higher values, followed by middle floor and then the ground floor with the weaker property values in those complexes.
There are a number of reasons why professional investors have avoided ground-floor units and apartments in the past, each of these being perfectly valid within the context of historical demographic and cultural trends/preferences:
1) Safety and security
Historically, unit dwellers have been mostly a younger demographic cohort, with singles, couples, or perhaps couples expecting their first baby, occupying units due to the cheaper cost of living whilst saving for a home of their own. Ground floor was always seen as less secure and therefore at greater risk of theft and damage.
2) Top floor units having better views and more private balconies
With most investors targeting more of a young single/couple/family investor persona, views and privacy is a crucial feature for investors to ensure tenants have peace of mind. A better outlook and maximum privacy helps to keep tenants happy and thus keep them renting your investment unit longer. This reduces vacancy periods and thus maintains solid return on your investment, so top floor eclipsed ground floor units in terms of demand by investors.
3) Noise
Top floor units have also been favoured by investors because of noise issues. With many light sleepers who are also rental property seekers, being on a ground or middle floor of a building can be a real turn-off, with footstep noise from the units above being the deal breaker between renting an apartment and not renting one. Top floor units do not have this problem and thus grow in capital value faster, as well as attract higher rental cost.
However this preference could be changing, and for NSW investors with a keen entrepreneurial streak, there could be genuine opportunities emerging with ground floor units. With some due diligence and forecasting, investors could be well placed to purchase ground floor units at lower rates, and reap the rewards later on in the holding period.
The reason for this is a combination of two dynamic factors:
1) The very recent – and well covered – news of the NSW state government’s upcoming changes to strata by-laws; and
2) Changing demographic factors in the NSW population coupled with the an increasingly urbanised and unit-preferential population
There are a number of strata by-law changes that the Department of Fair Trading is looking to push through, and these are expected to take effect by mid-2014. Of all the changes established, the most significant changes for ground floor investors are:
- That smoking will be prohibited on balconies and courtyards within individual units
- It will now be much easier to have a pet in a strata property than ever before
So how do these changes positively affect ground floor units? The answer in my mind is all to do with Australia’s aging population. NSW is Australia’s most populous state and also has one of the highest baby-boomer proportional populations in the country. As this generation moves into retirement age, demand for easy-access, level ground floor dwellings will no doubt increase in this state.
For me, the smoking and pets by-law changes is about reading between the lines. Most complaints to strata committees (which, when unresolved at a strata committee level, escalate to the NSW Fair Trading department, the team responsible for the strata by-laws restructure) stem from refusal of pets, and also complaints from elderly and family dwellers about neighbour’s balcony smoke blowing into their unit.
In my mind, the new by-laws have been developed in part to benefit and assist our increasing aging population who are downsizing to apartment living, as well as benefit young families. Smoke is a genuine turn-off for these dwellers, and as for pets it is well documented that having a pet helps boost the mental health of retirement age and elderly people, especially those who may have lost their life partner and are living on their own. Pet ownership can curb depression and also assist therapy for illnesses such as dementia too.
Where it used to be a trend for retirees and elderly to move out of capital cities, seeking ‘sea-change and tree-change’ lifestyles, to live in a bigger dwelling (i.e. a house on a larger lot), in a quieter, more remote, and peaceful town, new trend data now that suggests the opposite is occurring.
Retiree-aged Australians are increasingly wanting to remain urbanised, with the main reason being to be close to their families and grandchildren; not having to travel so far to see them regularly. Affordable houses with yards in metropolitan areas then becomes a challenge for retirees to source.
The other cultural shift occurring is one geared towards low-maintenance, well-located properties. So, units and apartments that do not have yards are much easier to maintain.
The pros of holding a retiree-age occupied, ground-floor investment property, far outweigh the cons these days, and here’s why:
- A growing retiree demand for ground floor housing – providing stairs are minimised and access is easy – this creates a growing tenant pool, which in turn increases demand.
- Sure, some mature tenants may simply prefer to live on the top floor of a building with a lift, however as an investor the increased strata costs to maintain a lift (along with any other amenities such as pools, tennis courts, water features etc.) may make this property type not as profitable as a modest non-lift building
- Elderly folks make great tenants! It will be very unlikely that your tenant will trash the place, create noise issues etc. In fact, in my experience my elderly tenants have maintained the properties very well, and even created a sense of community within their buildings, as well as reporting suspicious activity to local police
- Rental repayment security is also a positive. With most mature tenants being downsizers; cash-flow is quite positive and the commitment of an apartment is usually far less than the house they may have occupied previously
- Occupancy tenure is usually also excellent, with many retiree-aged tenants establishing themselves in a property with more of a long-term view than say a young family or couple, who are looking to move out as soon as their home deposit is saved
So perhaps it is time for investors to reconsider their stance on ground floor units and apartments. I do not doubt that middle and top floor properties will continue to grow also, however the opportunity for ground floor success is substantial.
Cameron McEvoy is a NSW-based property investor and maintains a blog, Property Correspondent.