Micro apartments a tricky investment for investors

However, analysis by RiskWise Property Research shows that micro apartments have many dangers, some of which may prevent investors from securing the property in the first place.

Doron Peleg, RiskWise CEO, said that many banks restrict lending to dwellings under 50 square metres. For micro apartments, he claimed it is unlikely the borrowing capacity would be over 80 per cent based on loan-to-value ratio, as some lenders can ask for a higher deposit than 20 per cent.

“It comes down to resale and if there is an issue of oversupply as well, which is often the case in these areas, then the lenders are very reluctant to proceed,” Mr Peleg said.

“These properties experience very little demand from owner-occupiers, especially as there is a strong preference towards larger units. In addition, many of these properties are bought off-the-plan and when investors try to resell they can be in for a nasty shock when they realise there is very little demand.”

He said that lenders were already cracking down on borrowing terms for higher-density developments. The banking royal commission is predicted to see lending restrictions tighten even further, which would result in those who could barely able to afford a micro apartment be unable to secure the necessary finance if their application was scrutinised.

Mr Peleg also said that purchasing an off-the-plan unit is significantly risky for equity, cash flow and settlement.

“There is a widespread oversupply issue which is universally acknowledged by banks which have blacklists for postcodes suffering potential unit saturation,” he said.

“Lenders will either require a much higher deposit as security on their loan, or they may turn down a loan application entirely.

“Lenders understand that oversupplied suburbs carry greater risk — and those risks are just as real for the investors who buy in those suburbs.”

He said combining off-the-plan with micro apartments results in a very risky proposition, as they cut out families as potential tenants, who would be looking for multiple bedrooms. Furthermore, if the market declines during construction, investors would be left with a mortgage on a declining property.