Melbourne June 2017

The month in review: Melbourne

By Herron Todd White
June 2017

Inner City
Inner city suburbs are highly sought after by owneroccupiers and investors. For example, just in the past two years the median price for houses in the suburbs of South Yarra and Carlton have increased by 42.7% and 25.7% respectively (source: RPData). Unable to afford relocation, owners turn to renovation of their existing properties to upgrade their living conditions while also saving money that would otherwise go towards acquisition and selling costs such as stamp duty and agency and legal fees.

In inner south-east suburbs such as Windsor and South Yarra and inner-north suburbs such as Fitzroy and Carlton, a popular choice for renovation works is the addition of extra bedrooms and bathrooms to original Victorian terraces by extending to the rear or adding a second level, however there are some significant limitations. Firstly, the entry level price point is high in the inner city suburbs and secondly, owners are faced with obstacles and difficulties of obtaining planning approvals for renovation works due to compliance with council’s heritage protection, access and overshadowing policies. Due to these restrictions and regulations, renovations usually take longer and ultimately end up costing more for the owners, making them less attractive to the investor market.

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When done right however, renovations can have a major positive effect on value. Pictured above is a circa 1900, 2-bedroom, 1-bathroom Victorian terrace which was renovated and extended by adding an additional bedroom and bathroom. The owner originally purchased the property in April 2014 for $819,000, added capital improvements and sold the property for $1.91 million, a 133% increase in just two years of ownership, when the average median price for houses in Windsor has only increased by 51.5% (source: RPData).

For investors in the inner city fringe market, renovations generally fall under one of two categories: minor renovations within conventional highrise developments (such as updating the kitchen or bathroom) in order to increase presentation and marketability as well as aid with leasing (but not adding much to the resale value) or, more significant renovations to older boutique apartments (circa 1970s to 1980s low rise buildings) to make them more attractive to a wider market and increase return on investment.

Renovations in inner south-eastern suburbs such as Malvern and Malvern East are increasingly popular amongst owners and investors. With a large portion of the dwellings in these suburbs being period style with construction dates ranging from 1890 to 1930, very few of the original style dwellings or even dwellings with dated renovations exist. It has been noted that buyers are willing to pay a premium for properties with dated renovations, with the trend to renovate according to their personal style rather than redevelop the property.

Due to properties in the area being of higher value, renovations are rarely on a small scale. Most renovations are quite substantial in size and cost, with many opting to fully renovate the interior while also extending the existing dwelling. With much of the area affected by various Heritage Overlays, the period façade must be retained to preserve the historical significance of the era.

The recent sale of 81 Claremont Avenue, Malvern for $3.95 million is an example of a high quality renovated period home. Since its previous sale in November 2011, a significant renovation was undertaken to this 1890s residence in 2014, including the addition of a second storey, an in ground pool and an internal upgrade.

South-eastern suburbs
Renovations in the established inner south-eastern suburbs have become increasingly popular in recent years, with TV programs such as The Block and House Rules appearing to have peaked investors’ interests in the popular trend.

Bayside suburbs, in particular Hampton and Sandringham, still have a substantial number of period dwellings with many incorporating Heritage Overlays to protect the historical significance of the era, and with specialised properties such as these, renovation is the most popular choice with home owners.

The popularity of renovated dwellings in the area is evidenced by the recent sale of 38 Myrtle Road, Hampton. The property originally sold in December 2013 for $1.197 million, however fast forward three years and add a substantial renovation, the now contemporary Californian Bungalow sold in October 2016 for an impressive $2.8 million, earning its owners a 230% jump in value in a short amount of time.

Investors are also seeking to pay a premium for unrenovated or semi original dwellings in order to renovate according to their own personal style. This is evidenced by the recent sale of 21 Grout Street, Hampton. The 619 square metre, semi original Art Deco brick dwelling sold for $2,288,500 which was an impressive $488,500 above the reserve. An existing Heritage Overlay on the property may deter developers, however properties such as these are especially popular with families looking to move into the coveted bayside area, known for its proximity to beaches, local shopping strips and a variety of schooling options.

While renovation is the current trend, it’s always recommended that home owners and investors be wary of construction costs when renovating to ensure they do not over capitalise and risk a loss on their investment.

Eastern suburbs
Currently we are observing renovations being completed in the middle to outer eastern suburbs by owner-occupiers. Home buyers are purchasing properties in the area they desire to live in whether they are renovated or not and then renovating them to their taste. In particular we can see this within the middle eastern suburbs such as Nunawading and Mitcham. Currently there is minimal difference between the sale prices of unrenovated and renovated properties. This is due to the low amount of stock on the market.

In some areas properties can be over capitalised by renovating them as the highest and best use would be as a development site. This is particularly evident in the middle eastern suburbs. An example of this would be the following two properties.

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The above properties illustrate that the quality of improvements in some areas do not reflect added value. In this case 75 Winmalee Drive was in better condition than 70 Winmalee Drive however, 70 Winmalee Drive sold for a higher price. This is due to the fact that the highest and best use for these properties is redevelopment.

As you get into the mountainous suburbs of the Dandenong Ranges, renovations do make a difference to value. This is particularly evident in Kalista and Kalormama where similar sized blocks of land with renovated dwellings are selling for more than unrenovated dwellings.

Overall, renovations can add value in the eastern suburbs unless the highest and best use is as a brand new dwelling or development site. This is more evident in the middle eastern suburbs than the outer eastern suburbs.

Northern suburbs
Overall, renovations appear to be relatively popular within established areas of both the inner and outer bands of the northern suburbs. This market is typically dominated by owner-occupiers looking to on-sell in the short to medium term, however there are still a number of investors looking to immediately on-sell after renovation works are completed. Another prevalent trend is renovating original dwellings from the 1960s, 1970s or 1980s and developing into two lot subdivision with a unit or townhouse at the rear.

Inner city suburbs generally provide a greater number of renovation prospects. It’s clear however, that the bulk of interest in dated properties relates to development potential and not renovation goals (where permitted). In developing areas of the mid to outer north, renovation does not appear to be as popular due to the large number of new properties.

Typically speaking, there is less potential to develop or subdivide in the inner suburbs and therefore more incentive to renovate as a way of adding value. Further from the city, there are a number of land developments planned and currently under construction prompting owner-occupiers and investors to buy new rather than renovating or buying recently renovated properties. Some owneroccupiers have indicated that while they may have made capital growth with their house increasing in value, any other house they would look to acquire would have equally gone up in value. Their view is to stay put and renovate.

In relation to freehold dwellings, kitchen and bathrooms are generally renovated as a minimum. Unit renovations do not appear to be popular given the relatively low price point to purchase new. Where renovation works have been undertaken they are often limited to basic aesthetic changes.

In the north eastern suburbs of Eltham and Montmorency, the buy-in price for a property needing renovation is in the order of $600,000 to $700,000 with sellers achieving prices in the order of $900,000 to $1 million after undertaking extensive renovation works. Within the middle to outer bands, without the help of capital growth, it seems renovations don’t generally add more value (profit margin) than the total buying cost, renovation cost, holding cost and selling cost. Those profitable renovations appear to occur closer to the town centre of the suburb.

One mistake is renovating a property that is too young; if it is near new it is unlikely that renovation works would increase the value enough to cover costs. Conversely, another mistake is renovating properties that are too old and thinking they are worth the same as new builds (with the exception of heritage properties). Renovating dwellings on potential development sites is less advantageous as developers then have to pay more for a renovated house they intend to knock down. It appears that developers would prefer to buy a rundown house with a view to knock down in the short term rather than paying more for a renovated dwelling with a high quality level of fittings and fixtures to knock down. Owner-occupiers and investors (in certain areas such as Macleod and Bundoora) may easily over capitalise on renovations as developers are prevalent in the market and therefore are not influenced by the level of renovation of the existing dwelling.

Western suburbs
In the inner western suburbs, renovations are a particularly popular pastime in suburbs such as Footscray, West Footscray, Pascoe Vale and Moonee Ponds. Perhaps surprisingly, we estimate that 70% of renovation projects are tackled by owner-occupiers, with the remaining 30% by investors, however the extent to which renovations are conducted do vary considerably between both parties. A large proportion of owner-occupiers tend to focus on non-structural works such as renovating bathrooms and kitchens, replacing floor coverings and cosmetic improvements. Investors in comparison tend to focus their efforts on extending the property through means of adding an additional floor or extending to the rear. Both methods are effective for realising a profit at the time the property is sold, but the overall reward of extending tends to be considerably more. It is however important to realise that part of this profit can be attributed to the movement in the market as a result of the time taken to complete such extensive renovations.

Owner-occupiers also tend to employ similar cosmetic renovations to unit developments in the inner western suburbs. Due to the restrictions imposed by their owners’ corporations, their renovation options are somewhat limited. Unit renovations are also popular with investors looking to make a quick profit and flip the property in a relatively short space of time.

Generally in the current market, renovations (both cosmetic and structural) tend to reap positive rewards. However, inexperienced developers and owner-occupiers have made the mistake of disregarding their target market and have in some instances removed the period features which many purchasers would come to expect. Other mistakes are to underestimate the amount of time taken to obtain council approval or meet the requirements of certain overlays or street restrictions.

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