Apartment size restrictions and property depreciation
Continued demand for housing in Australian capital cities has created debate in the past year over the minimum size requirements for apartments.
In New South Wales and Victoria in particular there has been much discussion over whether to mandate a minimum size for apartments, while in Queensland there is currently no intention to mandate a minimum size.
As the population of Australian cities grow, there is a need for an increased number of dwellings which take up smaller amounts of space, particularly in metropolitan areas. This trend indicates that further legislative change is likely, to manage the demand for these dwellings.
In New South Wales, new one bedroom apartments must already meet a minimum size restriction of sixty square metres, while new studio apartments are restricted to thirty five square metres. However, a number of older, pre-existing apartments were built prior to building codes being introduced through State Environmental Planning Policies and local council policy. Therefore a number of apartments exist which are smaller than current regulations. Additionally, local councils are able to enforce their own size restrictions, although these are unable to be under the minimum apartment size enforced by their respective state government.
Lenders also impose restrictions when providing finance for investors considering purchasing smaller units and apartments. Each individual lender has their own guidelines, but as a general rule most require a minimum living area of between forty and fifty square metres. Some lenders will additionally restrict their exposure to certain developments, only providing funding to buyers for a specified number of properties purchased below allocated sizes. Lending requirements such as the Loan to Value Ratio (LVR) may also change based on the size of a unit. This may mean investors who plan to purchase smaller properties may need a greater deposit.
Despite the hesitations some lenders may have in providing finance for smaller apartment dwellings, there are benefits for buyers considering smaller properties. Investors who purchase smaller apartments will often secure them at lower prices, yet can still achieve excellent rental returns that result in increased yields.
As investors frequently question the benefits of purchasing properties of different sizes, this can often lead to them asking staff at BMT Tax Depreciation ‘how will the size of an investment property affect the depreciation deductions that can be claimed?’
To examine this question and provide an answer, we’ve completed a comparison of the depreciation deductions which would become available to an investor purchaser for a variety of apartment sizes in different locations around Australia.
All of the properties compared in this study have a purchase value of $450,000.
The following table summarises our findings.
|Unit size and property depreciation|
|Property type||Property location||First year deductions||First five year deductions|
|44 sqm Studio apartment||Ultimo, NSW||$7,000 – $9,000||$36,000 – $39,000|
|49 sqm Studio apartment||South Yarra, VIC||$8,000 – $10,000||$37,000 – $39,000|
|70 sqm One bedroom apartment||Braddon, ACT||$6,000 -$8,000||$35,000 – $38,000|
|95 sqm Two bedroom apartment||Darwin, NT||$10,000 – $12,000||$48,000 – $51,000|
|132 sqm Three bedroom apartment||Runaway Bay, QLD||$14,000 – $16,000||$55,000 – $60,000|
The depreciation deductions in this case study have been calculated using the diminishing value method of depreciation.
As the table demonstrates, the size of each apartment will impact the depreciation deductions an investor can claim. However, it is important to note that while an apartment’s size may affect the depreciation deductions which can be claimed by a property investor, it is not the only factor determining the total deductions available.
A property’s size will generally only influence the capital works deductions an investor can claim for the structural components of the property. However, a smaller size apartment can restrict the plant and equipment items found within the apartment itself, for example the amount of carpets used will be smaller and the number of light fittings required will be less due to fewer room numbers.
Specialist Quantity Surveyors will also complete a full site inspection of the property to include all of the depreciable plant and equipment items an investor can claim. They will take into consideration the quality of finish and the age of the items contained within the property when calculating depreciation deductions.
Investors can also claim depreciation for common property items such as pools, tennis courts, gyms and lifts. However, smaller units in an apartment complex may have less percentage of ownership over common property areas than larger units.
Ultimately, the most important thing investors should remember is no matter what property they are considering purchasing, it is best to seek professional advice prior to making a purchase.