The rise and rise of the one-bedroom apartment

Affordability factors and changing lifestyle preferences are giving one-bedroom apartments a real edge in Melbourne’s unit and apartment market.

Property investors are increasingly finding they generate higher returns from a one-bedroom apartment than a two-bedroom unit.

A one-bedroom unit in a good location close to transport, employment and lifestyle amenities will almost always outperform a two-bedroom unit in a secondary location.

This applies to both the amount of capital growth the apartment owner achieves and the property’s appeal to tenants.

Seasoned residential property investors try to minimise their capital inputs. Most are small investors who would rather have a portfolio of four or five economical properties than own one large one to avoid too much exposure to the market.

According to some property commentators, the lower upkeep and purchase price of units with only one-bedroom, plus greater tenant demand for small units, is boosting prices for one-bedroom units.

Negotiating finance for one-bedroom units is certainly becoming easier. Until recently most banks believed two-bedroom units were more highly sought after by buyers and renters than one-bedders.

Banks used to give greater flexibility to an owner-occupier who could rent the second bedroom. They would also look favourably on investors who opted for two-bedroom properties.

But lenders are now much more relaxed about approving loans for one-bedroom units and in particular for small units less than 50 square metres in size.

If an investor prepares a spreadsheet tracking where the dollars will flow through the life of their investment, it will show that the purchase price for a one-bedroom unit is substantially lower than a two-bedroom unit, yet the rate of return is frequently the same.

For example, a comparison of three 1970s one-bedroom apartments in inner Melbourne, costing $450,000 to $500,000, with three two-bedroom units, dating from the Art Deco era to the ‘70s, which are priced between $550,000 and $800,000, underscores the merit of small apartments. Based on historical price growth, all six units can be expected to return an annual rate of capital growth of 7 per cent, which puts the lower-cost one-bedroom units at a distinct advantage.

The lower buy-in costs for one-bedroom units also means they provide a greater rate of return in gross rent, in percentage terms, compared to larger dwellings.

In Melbourne, developers are offering varied floor plans for new one-bedroom and studio units and are including more one-bedders in their developments. Older-style one-bedders in the inner-city are also in high demand because of their scarcity value – in most suburbs, there are fewer of them compared to two-bedders.

However, there are pros and cons to weigh up.  Some studies of tenant retention rates in inner-Melbourne show the average tenancy term for one-bedroom units is 15 months. For two and three-bedroom units, it’s 18 months. This suggests a landlord can end up with more vacancy time when they let a one-bedder.

Yet there is little doubt that as property prices rise, the one-bedroom apartment will become more accepted by tenants and owner-occupiers.

Professor Richard Reed, who lectures on real estate at Deakin University, says there is still some cultural resistance to one-bedroom units with a larger premium paid for two-bedroom units, regardless of household size.

“However, this perception is changing and there is increased pressure on affordability,” he says.

Apartment buyers need to remember that demand for land doesn’t drive the residential property market as overwhelmingly as it once did.

Rather, many people are out to “buy lifestyle” and are prepared to make trade-offs to live in a premium location. It is demand for somewhere to live that is conveniently-located and packed with amenity that counts for property buyers today, whether they are investors or owner-occupiers.