Houses vs units: where do villa units fit?

Many investors and homebuyers grapple with this question. They worry about the capital growth prospects of a townhouse versus a house, and homebuyers ask themselves whether they will outgrow a townhouse.

It’s not that black and white though. Well-located, beautifully proportioned townhouses and villa units can be enticing for tenants and home-buyers alike.

Many investors have a misguided idea about units and often they emphatically come to us and tell us “I’m not interested in a unit. It must be a house on it’s own block.”

I’ve seen plenty of sad cases over the years where investors have either targeted new house and land package offerings in the fringe outer areas in the hope for capital growth, or worse-still, tax benefits. So many of these investments have been problematic in terms of tenant quality, vacancy rates and limited growth. Without naming suburbs, I often tell investors that I’d rather target a great villa unit in the 10km radius over a large house on a full block some 40km out.

There is little debate that all things being equal with land value, a house will outperform.. but all things are not often equal. Houses are unique, blocks are unique and different suburbs offer different price-points based on land value. Importantly, it is vital that growth drivers are considered, target tenants are factored in, vacancy rates are understood and age of the property is known.

All of these things can affect the growth prospects of a property, and I could cite hundreds of examples demonstrating a unit’s growth outstripping a house’s growth. This unit in Surrey Hills is a great example of an out-performance asset. It is well-located, appealing to a wide array of buyers, popular for tenants, well built/renovated and is in the heartland of a strong-household-income demographic. Demand for this type of unit is consistently strong, provided the block is well-run, and no structural or flood issues impact the property.

In addition to all of these positive factors, the property is not too new.

The age of the dwelling has enabled the property to grow more aggressively than a similarly priced new property in the same neighbourhood because a greater proportion of the property value is now encapsulated by the land component. It is land which grows, not dwellings, but the land has to be in a great location too. Land to asset ratio counts for so much when it comes to growth prospects.

When considering units, what is commonly overlooked in our industry is the breakdown of units. By definition, a unit is a strata property on a subdivided block, but unlike houses (where a house is a house, regardless of block size), units come in all shapes and sizes.  From houses on subdivided blocks, through to townhouses, villa units and apartments, we can’t generalise a unit’s performance without segmenting this property type further. 

This little illustration touches on the breakdown of units and highlights why ‘median unit price’ is not reliable information.

Just because the data may state x% pa for units in a given suburb, it doesn’t mean that a townhouse will perform at the same rate as a new high rise apartment… yet they are both considered units.

Investors who assume data is always reliable are naive.

Units have copped a hard rap for a while now, and for unjustified reasons. We hear about Melbourne’s oversupply of new high-rise apartments in various locations on a daily basis, but this does not mean that units are a bad investment. For those who apply the right principles to their search, units like these above can provide exciting returns, great tenants and out-performance growth too.