Opportunities for new one-bedroom apartments in Melbourne?

The shortage of new apartments in Melbourne has been well-documented in the last 12 months.

It's proving more difficult than anywhere else in the country to develop new projects. 

Charter Keck Cramer Associate Director, Ben Carter, says the least discussed issue is how the cost of development is shaping the unit mix of the apartment supply pipeline.

"Charter Keck Cramer has observed, and in certain cases advised for, a reduced proportion of one-bedroom accommodation within upcoming apartment developments in Melbourne," Carter says, adding that the central constraint is the price ceiling of one-bedroom apartments and the associated inability to offset higher project costs.

"In short, prices of one-bedroom apartments cannot be increased to the same degree as other configurations due to the generally limited financial capacity of the purchaser and the ultimate rental value if intended for an investment," Carter suggests.

However, Charter Keck Cramer is expecting Melbourne’s established unit market will continue to recalibrate upwards over the next 12 months. With the upward recalibration, that will see the price gap between new and established apartments narrow, they anticipate an "elastic response in demand" for off the plan one-bedroom apartments at higher price points.

"At present, the gap between the price of off the plan one-bedroom product close to a project’s required blended rate (around $14,000 per sqm) versus established one-bedroom (and in some cases two-bedroom) units is too large to attract widespread purchaser demand," Carter says.

"Until such a time that pricing in the established market increases, the feasible delivery of one-bedroom apartments at higher values will remain challenged for many BTS projects."

Carter says in the meantime, projects that are well positioned to deliver competitively priced and well-designed one-bedroom apartments are expected to be met with market acceptance from a variety of purchasers and face little competition from new supply.

There is likely to be an increase in demand for one-bedroom apartments in the medium to long term, given more than 30 per cent of lone-person households occupy one-bedroom apartments across Melbourne.

"Assuming this propensity remains equal (which is conservative), this would equate to a need for an additional 30,000 one-bedroom apartments across metro Melbourne by 2031. By the same logic, couples will drive demand for an additional 20K one-bedroom apartments."

Carter says many recent projects are targeting downsizer purchasers with premium quality two and three-bedroom apartments that carry lofty price tags which leaves younger purchasers out in the cold.

"For younger purchasers, one-bedroom apartments often represent an affordable housing option in a less affordable location. This allows them to transition from share houses or the family home and benefit from the security of home ownership while not sacrificing proximity to lifestyle and employment opportunities.

"Many of these persons are finding themselves priced out of new projects, leading them to become increasingly active in the established market or choosing to remain on the sidelines, thus contributing to latent demand."

Carter believes there are opportunities for Government to step in.

"Delivering one-bedroom apartments is important to achieve various Federal, State and Local Government housing goals. This includes meeting overall dwelling targets (particularly within inner city locations) and providing a diversity of housing, as well as affordable and key worker housing."

He said more flexible planning policy would allow for more supply, as would the reintroduction of off the plan duty concessions and exemptions for investors and a reduction of foreign buyer levies.

"Property tax reform is an essential step to boost housing supply across Melbourne.

"There has been a marked decline in Melbourne’s apartment launches and subsequent completions since the abolition of investor stamp duty concessions and exemptions for off-the-plan properties (2017) and the increases to foreign investor surcharge (2016 & 2019).

"Recent rises in construction costs and interest rates have only compounded this slowdown. Despite political reservations about investors, it is crucial to acknowledge their role in supporting new housing supply for Victorians. This cohort will drive sales (and rental supply) of new one-bedroom apartments due to the attractive yields and price points."