Housing shortages and rising rents have triggered a fresh wave of demand from commercial investors for humble blocks of units. In Western Sydney, sales and inquiries for low-rise residential apartment complexes have outstripped those of all other commercial assets this year so far, while this month on a 1970s-built block of 16 units in the north shore suburb of Lane Cove sold for $500,000 above the price guide.

From individuals and investor groups to strata traders and property giants, the opportunity to capitalise on the growing market for affordable apartments is proving highly attractive. Returns show no sign of slowing and nor does buyer or rental demand in light of Australia’s on-going migration-fuelled population boom. National figures show that average apartment rent has grown 9.4% in the past 12 months, and about 6.9% annually over the past five years. Furthermore, existing apartment blocks are being seen in a more favourable light thanks to the economic headwinds causing havoc across large segments of the development and construction industries.

Keeping it simple

The Lane Cove block sold for $11 million after a competitive auction at which five of the seven registered bidders participated. The property was typical of the suburb’s many tightly held unit blocks, being a three-level walk-up, with garages at ground level and two floors of apartments above. Located at 96 Burns Bay Road, it had been under the same ownership for 50 years and comprised 8 one bedroom and 8 two-bedroom units. The auction was held by Ray White Commercial Eastern Suburbs and Ray White Double Bay.

One of the hottest markets for unit blocks this year has been Western Sydney with $130 million of transactions recorded in the first four months of 2024. Ray White Commercial Western Sydney director Peter Vines said the combination of rising prices, rising rents and low vacancy spurred on by the region’s burgeoning population had created “a recipe for investment success”.

“Investors can buy blocks of units at almost below replacement values” Mr Vines said. “This way they avoid the process of having to buy blocks of land and develop from scratch at a time when construction costs are high and the time for approvals is lengthy. Right now, refurbishing existing blocks of units is seen as a more appealing option and some of our clients are holding onto these assets due to their value.”

Apartments proving popular

Across Greater Sydney, values in the residential unit market have grown 5.3% in the past 12 months, and annually, at an average of 4.4%. “With pressure on supply and both approvals and completions remaining below anticipated demand, prices will only continue to increase,” Mr Vines said. Rents are under the same kind of pressure, apartments averaging around $700 a week after jumping over 9% over the last year. Mr Vines said in Western Sydney, private buyers remained the key investors in the asset class although more recently there had been an increase in private syndicates and offshore funds moving into the space.

The shift follows not only the rise in building costs but also a reluctance among financiers to commit dollars for construction. For many the numbers aren’t stacking up, the Deague Group’s chief executive Will Deague conceding: “We’re certainly not building high-rise. The cost of building doesn’t work – it’s now costing $16,000 per unit instead of the $10,000 to $11,000 we used to be selling at.”

Other data shows apartments closing in on houses as the most popular properties for Sydney homebuyers with Parramatta CBD coming out on top as the most popular. There were almost 700 purchases of Parramatta units in the previous 12 months making them the most frequently traded of all properties in the city.