Stratum Title… what does it mean?

We often hear about strata title; it’s the mainstream variant of ownership when we consider a property in a block of other properties. Typically these types of properties are apartments, townhouses and villa units. The owner of a strata property will own the specifically bounded property and an equal (and undivided share) of the common property. Common property is otherwise known as shared land.

Company share title predates strata title, (introduced in Australia in 1961) and was an effective way for ownership to be divided between unit owners. Rather than owning a specific footprint of the property each, a company would own the entirety of the property, of which shares would be owned by the collective of owners. Depending on the size of each unit, some shareholdings would vary; for example; 100 shares for a one bedroom apartment vs 160 shares for a two bedroom apartment. Voting rights would be accordingly weighted also.

Company share title is not favoured by the lenders. Some lenders won’t lend at all to this title type, while others will do so on a limited LVR, (loan to value ratio) basis. Typically mortgage insurers won’t accept company share title properties, so this does limit LVR’s to somewhere between 60-80%, depending on the lender.

In short, this title type requires a borrower to have a minimum of 20-40% deposit.

This additional hurdle cuts a lot of buyers out of the eligibility stakes, and in turn restricts the total buyer pool for such a dwelling. The effect of limited buyers translates to lower prices. It is no secret that this type of title often gives way to bargain buying.

This can be advantageous for a “buy and hold” strategy, but it can be challenging if the buyer wants to sell in a weaker market.

Particularly in Melbourne, plenty of Company Share titles exist and they are often found in the inner south/east of our city; typically where we’d find beautiful Art Deco era dwellings.

Many company share titles have since been converted to strata title.

The cost of doing so varies, and the process is not a quick one, however it can be quite worthwhile in terms of invisible value-add. Often, when the cost exceeds expectations, other factors are at play, for example; upgrading fire escapes and balconies to comply with current code.

The strata conversion process requires nine steps as follows:

Company Share title essentially means that the owner does not own physical properrty; only shares in a company that owns the physical property.

However, things get a bit different when it comes to stratum title.

Stratum title is a mixture of company share title and strata title.

Stratum title dwellings are a physical parcel that are owned by their respective owner. The common property, however, is owned by a service company, of which the dwelling owners have shares within.

Banks feel very similarly about stratum title properties as they do company share title properties. Some have slight variations in their lending policy between the two, but the LVR restrictions still apply. Subdividing a stratum property would likely involve less work and cost, and many buyers factor in the conversion costs when they approach the purchase price decision.

Interestingly, we had not one, but two stratum property purchases in the past seven days. Each client was well aware of the challenges and limitations of stratum, and each also understood the relative discount value on offer for their respective purchases.

This superb Art Deco gem in Elwood was secured for under one million dollars; no mean feat considering the last attempt to purchase a similar, but slightly inferior product resulted in disappointment when the apartment sold for almost $1.3M.

This spacious 1960’s style apartment in Melbourne’s inner-west was secured for $385,000 after comparing the cost differential between a comparable strata product. An equivalent style 2BR apartment in a neighbouring street sold four months ago for $470,000.

The cost differential between strata and stratum meant that our client could purchase a two bedroom apartment in the inner-ring for the same price as a one bedroom, strata property.

Aside from the value proposition, her gross rental yield, (should she ever decide to rent the property out) would be around 5%; a significant figure for the area.

The biggest upside, however is the potential for adding value down the track.

One day, when the time is right, and when the other shareholders agree, each of these buyers could add significant value through a clever investment in an invisible upgrade:

….the conversion of stratum to strata.