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Apartments in Darwin, the key for your portfolio growth? Darwin is one of the few places in Australia that didn't see a massive price boom in the past five years. Does the data support that now is the time for Darwin? In this episode, we're looking at how supply plays a huge role in apartment performance, how Darwin's apartments actually perform, how they compare to a house in a similar location, as well as how much strata can turn that high rental yield into low cash flow in reality. I'm Jo Ma, the Senior Research Analyst at InvestorKit.
Let's get into it. Now, Darwin's apartments may look attractive. Lower price, high yield. But is it really a good idea to invest in apartments in Darwin? Let's take a closer look.
First thing, why apartments usually underperform houses? There are three major reasons. One, apartments are subject to oversupply risks. As long as planning rules allow, apartments can grow vertically almost unlimitedly. Second factor is building depreciation.
As we know, when we buy an apartment, the value of the building takes a large proportion in your overall property value. So over time, the depreciation of the building will affect the overall value appreciation of your property. And then the third reason is the high strata fees. While apartments usually have a higher yield than houses, strata fees are also very high. When we deduct the strata fees from our cash flow, the actual net yield may not look that attractive.
Therefore, while apartments might look attractive from a cash flow perspective, on the surface, the overall returns over time are usually much lower than houses. Now let's look at how Darwin's apartment market has performed and if it is prone to the same issues with apartments in other markets. So first, from a growth perspective, on the screen, I'm showing you the price growth of Darwin's house market and apartment market over the past 20 years. In total, houses increased by 120% over 20 years in value. At the same time, units or apartments increased by 85% in total over 20 years.
If we look closer, from 2005 to 2016, units or apartments actually outperformed houses. That's very likely because in the 2000s, Darwin's population boomed. A lot of fly-in, fly-out, a lot of mining industry workers flooded into Darwin, pushed up the apartment demand high. And at the same time, new apartment supply couldn't catch up with the surging demand. Therefore, apartment value was surging at the same rate or even a higher rate with houses.
But then in the early 2010s, apartment demand declined as the mining boom ended. At the same time, apartment supply boomed because of the large amount of construction from 2011 to 2016. That has caused flatlining of apartment values and eventually a much sharper drop in apartment value compared to houses after 2015. So now we know that at least at a greater capital city level, Darwin's unit markets didn't outperform its house market over the past 20 years. And now let's zoom into Darwin's city center and see how houses and apartments have performed over time in areas with plenty of both types of properties.
In Darwin's city center, we have three suburbs with a high amount of apartments. Darwin City, it's almost 100% apartments. Larrakia, 65% of the properties are apartments. Stuart Park, 48. 5% of the total dwelling are apartments.
Now let's compare how houses and units have performed in Larrakia and Stuart Park. I'm not using Darwin City because we don't have a house market to compare with the unit market. In Larrakia, over the past 20 years, units have increased by 49% in value. At the same time, houses have increased by 82% in value. Similarly, Stuart Park unit value increased by 44% while house prices increased by 77%.
So overall, house markets have outperformed unit markets by approximately 50% in value growth over the past 20 years, proving that in terms of capital growth or value growth, houses are still a much better performer than the units. Apartments underperform because of the same reason, oversupply. Currently, yes, we do not see a large amount of apartment construction happening around Darwin, as we can see from the previous chart where I also show the number of building approvals of both houses and apartments. But that doesn't mean there will never be large projects happening. If Darwin's market continues to heat up, it's very likely that more developers would be attracted back to Darwin again and boost the apartment supply.
Now we've looked at the capital growth side. How about cash flow? One big reason why apartments' net cash flow may not look the best is the high strata fee. Then how about in Darwin? Is it similarly high or even higher?
The truth is Darwin's apartments usually have higher strata fees compared to other capital cities. This is because of several reasons. First, Darwin is in a cyclone zone. Apartments require heavier engineering, stronger materials, wind-rated glasses to make them safer in case of cyclones. As a result, we see higher construction costs and higher ongoing maintenance costs.
And these higher costs would flow on into our strata fees. And second reason, similarly, Darwin is in a cyclone zone. That means higher insurance premiums for the building insurance. In addition, there are fewer insurers operating in the Darwin region. That means less competition and higher prices.
The third reason, because of the small size of the Darwin market, there are actually fewer strata companies running their businesses there. Again, less competition would lead to higher strata management fees. And fourth, as Darwin is relatively remote, the labor costs and material costs are relatively higher than our cities in the south, which are better connected and better supplied with labor and materials. So as a result, strata fees for Darwin's apartments are actually higher than what we usually see in Sydney, Melbourne, Brisbane, or other cities. Here, I have some examples.
These are just random examples. I just went to realestate. com. au, checked recent sold properties, and grabbed the top four properties that had strata fee information and rental appraisals. So let's have a look.
First, 24 Litchfield Street, two bed, two bath, one car space. Building was built in 2008. Strata fee per quarter is $2,158. The sold price was $507,500. Weekly rent ranges from $750 to $780.
Its gross yield without considering the strata fee would be 7. 5%. That's really good. But if we deduct the strata fee from our rental income, our yield would become 5. 8%.
If we further adjust it for council fees, the net rental yield would be just 5. 5%. Not really bad, right? Let's continue. Second property, 9 Carey Street, three bed, two bath, two car space.
Built in 2003, relatively older. The quarterly strata fee is $2,713. It was sold for $485,000. Weekly rent is $630, making its gross yield just 6. 5%.
After adjusting for strata fees, 4. 3%. If we further adjust it for council fee, it'll be just a 3. 9%. Third property, Zest Darwin, 5 Gardiner Street, one bed, one bath, one car park.
Built in 2012. Quarterly strata fee, $1,996. It was sold for $266,000. Estimated rent would be $520 to $550. Gross yield is really attractive, 10.
1%. But after adjusting for strata fee, it has only 7. 1% left. And then after adjusting for council fee, it has just 6. 4% left.
- 4%, it's not bad at all. It's much higher than many other regions' yield. But remember, just seconds ago, it was 10. 1%, something unbeatable.
This just shows how strata fees can discount your cash rate significantly. And the last property, 84 Esplanade, really attractive area, one bed, one bath, two car spaces. Sold for $510,000. And quarterly strata is $2,084. 5.
It's rented for $600, making the gross yield just 5. 9%. After adjusting for strata fees, it has 4. 2% left. And then if we further adjust it for council fees as well, there's only 3.
9% net yield left. You might argue, apartments are still much more affordable than houses, right? Not really. If we look at the Palmerston area in Darwin, the house median price now is just $600,000. That's not much higher than many apartments in our examples.
For example, the $510,000 one-bedroom apartment at 84 Esplanade, or the two-bedroom apartment sold for $507,000 at 24 Litchfield Street. Palmerston's gross rental yield now is 6. 4%. After adjusting for council fees, it still has a 5. 7% net yield left.
And that is much better than either the 84 Esplanade or the 24 Litchfield Street apartments. So in summary, Darwin is no exception when it comes to the choice between houses and apartments. You're a property investor. You want to invest for performance, for growth, for the highest return possible. And data doesn't say that that choice is found in apartments over houses.
So stick with houses. Apartments may give you a huge gross rental yield, but once we've taken the tons of expenses out from it, your cash flow actually doesn't look that much better. Further cementing the point, houses are the superior choice for property investors. I'm Jo Ma, the Senior Research Analyst at InvestorKit. I'll see you next time.
