Micro-apartments

Intro

Micro-apartments are ultra-small living spaces that are designed to be more affordable for renters and buyers, and more profitable for development companies. And while smaller apartments are—and have been for a long time—the reality in high density metropolises such as Tokyo and New York, it’s not a feature of most Australian apartments. That is, until recently. 

While on average in Australia, you can expect a one bedroom apartment to be at least 50-60 square metres, they are shrinking. Victoria does not have minimum apartment sizes, but they do have a set of design standards that need to be met. The result, according to Boarding Studios, is apartments as small as 15 square metres being offered for sale in Footscray and other Melbourne suburbs. 

To put that in perspective, that’s even smaller than the minimum size allowed in New York and Hong Kong. The real question however, is this: are micro-apartments a sustainable solution to an affordability problem in the housing market, or do they exploit renters?

What’s a micro apartment?

Although there is no official definition, a micro-apartment is generally considered to be a living space smaller than 35 m2, including bathroom and kitchen. That’s roughly the size of a two-car garage. Some micro-apartments are even smaller than that. 

The trade-off for a smaller living space in some cases can include access to pools, gyms, barbecue areas and other facilities. But in other cases: there’s nothing. 

Australian states and territories generally have minimum size limits on one-bedroom and studio apartments. Developers are pressing for relaxation of these limits, insisting that spaces designed well can afford to be smaller—perhaps significantly so. 

But there are two problems with this. Firstly, most such apartments are in fact not well-designed at all. The second issue is livability. Who would want to live in a (poorly designed) space this size?

The appeal of micro-apartments

In a nutshell: location. Tiny apartments tend to proliferate close to vibrant neighbourhoods and urban city centres, and are usually well serviced by public transport. Small apartments offer location, security, privacy (in some cases, anyway) at a price tag more people can afford.

Micro-apartments also commonly share heating, cooling and cleaning expenses. Most complexes have on-site managers that manage rentals, maintenance, conflicts, and so on. From an environmental perspective, micro-apartments make sense: they literally minimise an individual’s carbon footprint and allow for greater population density. Coupled with smart design and clever use of space, they could be a viable option for a densely populated Australian city of the future. 

But rarely is smart design and quality construction a feature of Australian micro-apartments. And neither is affordability.

More or less affordable than ‘traditional’ housing?

Micro-apartments are not necessarily more affordable than traditional housing. When measured per square meter, they are in fact more expensive than most mansions. What’s more, they’re in high demand, as with most inner-city housing. None of this helps renters, either, and that’s a problem for property managers. 

Why so? While some micro-apartments are designed beautifully and sustainably, most are not. News.com.au describes apartments so poorly designed that doors cannot open properly. Lack of basic storage space, tiny kitchens and oppressive, windowless rooms are other common complaints. A 2017 review of 3000 Victorian apartments showed that just 9 (or 0.3%) met the minimum design standards for that state.

Do micro-apartments exploit renters (and annoy property managers)?

The key is liveability and cost to rent. Minimum requirements for apartments in terms of space and livability exist for a reason: to protect renters and purchasers from exploitation through over-priced rents and lack of value for money. Properties that don’t meet basic livability standards but charge as though they do might be exploitative.

Overwhelmingly, micro-apartments don’t exist for the benefit of the occupant: they exist to squeeze maximum rent yield per square metre for a landlord. To a degree, renters are able to signal their acceptance or not of this arrangement with their wallets. Nonetheless, they are still subject to market demands such as affordability and availability, and in a tight market, renters may not have much choice. 

It’s worth noting that banks rarely agree to mortgages for micro-apartments for owner-occupier purchases in Australia, specifically because of their lack of desirability and livability. And a tenant renting this type of space is likely to understand these issues firsthand. 

As their property manager, you’ll be the one who hears about it—not the landlord. Accordingly, you can expect a higher level of labour and resources associated with managing these types of properties.

Should you welcome micro-apartments into your property management portfolio?

According to National Real Estate Investor, they seem to be a ‘stable niche within the multifamily sector’. But micro-apartments are also notorious for high tenant turnover. Rarely do tenants stay more than a year, and that translates directly to a higher cost for your business to manage.

With that in mind, there are two truly viable options for a micro-apartment or suite of such apartments in your portfolio. First: see if the owner will consider letting it as an Airbnb or holiday apartment. Depending on the location, the body corporate policy for holiday letting and number of competing listings in proximity to the apartment, this route may end up being considerably more profitable than a long-term rental anyway.

Second: charge a premium management fee. Smaller apartments are likely to bring in less profit to your agency on a rental yield basis, but will take the same amount of time or more to manage. You may also want to consider charging extra fees to account for a more or less continuous cycle of vacates, advertising, tenant onboarding and so on associated with their lack of livability. 

In our view, micro-apartments are one of the least desirable types of long-term rentals for property management businesses. Either don’t take them on, or be prepared to charge what it will actually cost you to manage it. It’s not just landlords who are supposed to profit from renting properties—your business needs to be geared for profit too. 

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