Instead of following the trend of jumping into commercial property as part of their portfolio, investors have been encouraged to consider units and apartment blocks.

According to LEVR Group founder and director Josh Crealy, while the solution to the country supply issue would be to build more, rampant construction costs have made it infeasible for most developers.

On The Smart Property Investment Show, Crealy said that with raw construction costs for a unit often around $500,000, developers would need to sell at around $1 million to make a profit and cover their additional costs and fees.

Crealy said that while new-unit construction made sense in high-demand areas where values were inherently higher, developing apartments in more affordable areas just didn’t stack up financially.

“No one is going to start building because they can’t sell them for high enough until the prices increase,” Crealy said.

“You have that in-built protection against supply, because developers can’t make enough money from them.”

Melbourne boutique apartment: The asset of choice

Across the country, Crealy said that Melbourne’s conditions had created a perfect storm for investors to capitalise on.

He said Melbourne had unveiled itself as an attractive market for both first home buyers chasing affordable homes and investors seeking strong yields.

“It’s just way more affordable than it is in any other market.”

“On the ground now, you can see that the demand is there, especially in that sub $450,000 unit market.”

Crealy said he believed units in Melbourne were similarly positioned to Brisbane’s market four or five years ago.

He himself purchased 15 properties in the Victorian capital.

“I looked at it, and I saw the opportunity. That’s why I have gone so heavy on it myself.”

Crealy said that units should be the go-to play for investors looking to strengthen their portfolio, particularly given the volatility of the national property market.

“Rents can only move so high before it makes more sense to buy rather than rent.”

He said investors should target apartments with low strata or body corporate fees, which usually come in smaller boutique unit blocks, which would have little to no amenities.

When buying in a boutique block, Crealy said investors should double up their due diligence on pest and structural issues and review body corporate development plans.

Crealy said that while many investment experts believe that a pivot to commercial property was an essential part of developing a reliable portfolio, it was not without risk.

Conversely, for investors looking for a larger-scale purchase, Crealy said they should consider unit blocks.

“I feel like the tenancy risk is lower (in residential), like everyone needs an affordable unit to rent in a capital city. That’s not going to change.”

“The net yield after land tax, insurance, rates, and fees is comparable to commercial properties.”

He said that individual units were a stronger opportunity for investors who needed more flexibility to refinance and continue growing their portfolios, while apartment blocks could serve as an important cornerstone for a buyer looking to set themselves up for retirement.

“They’re good for someone later when they want to retire, and they’ve got the equity, but they don’t have the servicing, and they need to do a lease-stock loan,” Crealy concluded.

Listen to the full episode here

This article was first published on Smart Property Investment, a sister-brand of Property Buzz.