Micro apartments no longer a taboo for property investors

Priced out of the real estate market, young professionals, first-time buyers and investors who prioritise location over space are increasingly driving demand for smaller properties.

A 17 square metre micro-apartment in Bondi beach recently sold for $511,000, showcasing the high prices some people are willing to pay, especially in highly desirable locations.

In Australia, studio apartment sizes typically range from 30 to 50 square metres. In urban hubs like Sydney and Melbourne, studio apartments can be even smaller, with micro-apartments sometimes measuring as small as 15 to 25 square metres and the standard size of a micro apartment measuring 32 square metres.

Shared communal spaces at micro apartments are proving popular among migrants, young professionals and budget-conscious investors. (Photo: Craig Francis)

These micro apartments are compact, highly functional living spaces typically under 32 square metres, designed to maximise efficiency while maintaining comfort.

They feature layouts with a kitchenette, bathroom, and compact living area that easily converts into a bedroom using multifunctional furniture.

Prioritising flexibility, the design allows the space to adapt to the occupant’s needs. While similar in size and layout to student accommodation, micro-apartments often boast more upscale and stylish finishes.

At the core of these designs is the concept of ‘flex living’, which emphasises innovative use of space to create versatile environments that seamlessly adjust to suit the resident’s lifestyle.

Multifunctional furniture like foldable beds that transform into desks and dining tables that double as workspaces or storage solutions offer flexible living options. This adaptability extends to the layout, with open plan living areas that can be reconfigured for different activities throughout the day.

Clever storage solutions such as modular shelving and hidden compartments, optimise vertical space, helping to reduce clutter, contributing to a tidy and organised atmosphere. Although private space is limited, shared communal areas, like co-working spaces, fitness centres and lounges, offset the smaller personal space, enhancing the overall living experience.

Smart technology, like automated lighting and temperature control, further optimises the space, creating a seamless and efficient living environment.

More micro apartments being built

Many micro-apartment developments are now part of multi-use projects, combining long-term and short-term rentals with hotel-like amenities, including health and wellness facilities, retail experiences, and social dining areas, offering both luxury and community in compact urban settings.

These properties aim to offer diverse tenancy options, ranging from extended business stays to affordable long-term rentals, often blended with hotel accommodations to cater to young professionals, business travellers and students.

The minimalist philosophy of flex living in micro apartments resonates with investors who prioritise sustainability and social responsibility, who aim to address the housing shortage by creating accessible housing solutions that emphasise community-focused shared spaces.

New developments featuring micro-apartments are on the rise, and older buildings are also being repurposed for this trend.

Underutilised office spaces, former hotels, and older apartment blocks near cities or transport hubs are being converted, appealing to investors drawn to their prime locations and amenities.

Property investment gateway

For individual investors, micro apartments present an intriguing opportunity, especially as the cost of larger properties becomes increasingly prohibitive.

These units tend to be less expensive to buy than traditional apartments, making them a viable entry point for first-time investors and rentvestors. They are usually situated in desirable, high-density areas, where they yield higher rent per square metre, making them a viable investment.

However, financing individual micro apartments can be complex, as lenders often approach them cautiously due to their unique design constraints.

Loan-to-value ratios (LVR) for micro apartments are typically lower than for standard properties, often capped at 70-80 per cent, which means investors may need a higher deposit of up to 30 per cent or even higher in some cases.

Most major lenders also require an internal floor size of at least 40 square metres (excluding balconies and car spaces) for loan approval. While some lenders may accept smaller sizes, as low as 25 square metres, they often impose stricter loan conditions.

As the market evolves, there may be an increase in individual investors exploring these properties as cost-effective investments with the potential for strong rental yields, which may eventually soften the lending restrictions on these homes.

Flex living in micro apartments offers a partial solution to the housing shortage, particularly for young people and migrants who seek affordable living options in high-density areas, with close proximity to transport, work, and amenities outweighing the desire for space.

Critics argue that building more micro apartments is not a substitute for making housing more affordable overall. They advocate for an affordability adjustment in well-connected urban areas to better accommodate a wider range of residents.

As Australia’s housing market evolves, flex living in micro-apartments is expected to become an increasingly viable option, as it has in other parts of the developed world.

Tax deductions can enhance cash flow

While not suitable for everyone, these compact, efficient spaces offer an alternative for those priced out of the traditional housing market, helping to ease the pressure on young Australians and other under-served groups.

As forward-thinking developers and operators embrace innovative housing solutions, micro apartments present a potentially lucrative niche for investors, creating blended communities that combine short-term flexible rentals with traditional long-term leases, making this an opportunity worth exploring.

Whether owned by an individual or group of investors, renovated or part of a multi-use development, micro apartments are eligible for property depreciation for both Division 40 plant and equipment for the integrated appliances, flex living design and storage solutions, and other moveable assets, as well as the Division 43 capital works.

Additionally, the communal areas in micro-apartment developments, like co-working spaces, gyms and shared social spaces, may also qualify for depreciation.

By leveraging these deductions, investors can improve cash flow and enhance the overall return on investment, making micro apartments an attractive proposition in high-demand urban markets.