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Nice Neighbourhood But Dud Investment

Nice Neighbourhood But Dud Investment
October 22, 2020 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

Property: we can see it, we can touch it, we can read lots of stuff about it, and it is easy to think that we understand what drives the price of it. It is, oh, so easy to develop a false sense of confidence when it comes to investing in real estate.

A much younger version of myself fell for this trap when I purchased my first investment property.

Back in 2002 and for only $269,000, I purchased a little piece of paradise with 180-degree ocean views that could never be built out. Located on the esplanade, it was in walking distance to lots of shops, cafes and restaurants, and it was less than an hour’s drive to Australia’s third biggest city.

While I didn’t realise it at the time, I had confused neighbourhood features and benefits for market fundamentals.

Three years after buying the property, the initial purchase value had increased by an incredible 63 percent to $440,000. I can still recall believing that I had found the recipe for Colonel Sanders’ secret herbs and spices.

Then the property dropped more than 30 percent in value over the following two years. In fact, when I eventually sold the property in 2016, the last 11-years of owning this property produced a decline in value of 3 percent.

I found myself asking ‘how could a property grow in value by 63 percent in just 3-years and then lose 3 percent value over the next 11-years?

One thing was certain, it had noting to do with the beach, the view, the shops or capital city proximity because they were constant throughout the entire 14-years.

I frequently reflect back on my initial decision to buy this property as one of *many* important pieces of experience that has shaped how Propertyology today analyses and selects locations to either avoid or to invest in. Pain can be a great ‘teacher’ if one takes the time to understand the cause and to then apply the learnings.

 

CASE STUDY: West End / South Brisbane QLD

Over the decade ending 2019, Brisbane was Australia’s second fastest growing capital city population.

The adjoining (inner-city) suburbs of South Brisbane and West End are a casual walk to the CBD and on the train line to get elsewhere in Brisbane. The suburb is a wonderful mix of contemporary and eclectic with great cafes, lots of urban renewal, and year-round amazing weather.

Attractions include a plethora of restaurants, Southbank, great river walks, a world-class theatre, museum and the state’s biggest convention centre.

The suburb hosts a university with heaps of students seeking rental accommodation, another university is directly across the river, and a nearby major hospital was a recent beneficiary of one of the state’s biggest infrastructure projects.

Many would think that we’ve just ticked lots of property investment boxes. And the thought of being right amongst this through buying a modern apartment for an affordable $500,000 (or less) probably sounds salivating.

 

Related article: Ticking the right boxes

 

The thing is, those properties today are worth 10 to 25 percent less than 10-years ago, values are likely to fall further, and it has become increasingly difficult to secure a tenant.

Meanwhile, property asset values in numerous other parts of Australia, with very different neighbourhood ‘features and benefits’, have performed significantly better and they currently have an extreme under-supply of accommodation for tenants [refer below].

Unless one can accept that ‘capital city’ has nothing to do with capital growth or low risk, property investors give themselves no chance of making truly informed financial decisions and an opportunity to realise one’s full potential.

Underpinning the soft performance of West End and South Brisbane is the underwhelming Brisbane economy for the entire last decade. Greater-Brisbane’s median house price only increased by 19 percent over the 10-years ending July 2020.

More specific to the inner-city suburbs, much of the urban renewal and gentrification is centred around increased housing density and high-rise apartment living. Back in 2001, detached houses in West End and South Brisbane represented 46 percent and 20 percent of residential dwellings. By mid-2020, this had reduced to 24 percent and 5 percent.

On mobile? Scroll across to see all columns.

Dwelling volume Median age Dwelling proportion rented Median property value 10-year capital growth Median rental yield> 5-year rent growth
West End (H) 1,514 (24%) 33 61% $1,036,000 27.4% 3.1% 0.0%
West End (A) 4,695 $499,000 -8.9% 4.3% -7.6%
South Brisbane (H) 372 (5%) 30 66% $1,089,000 na 2.4% -13.9%
South Brisbane (A) 6,419 $488,000 -0.4% 5.6% -1.0%
Maitland NSW (H) 27,614
(92%)
36 30% $480,000 43.3% 4.6% 13.5%
Launceston TAS (H) 23,780
(84%)
39 34% $355,000 36.5% 5.3% 25.0%
Bendigo VIC (H) 35,855
(88%)
39 28% $375,000 47.1% 4.7% 17.2%
Mount Barker SA (H) 11,983
(94%)
39 23% $425,000 13.3% 4.7% 4.2%
Toowoomba QLD (H) 52,500
(82%)
38 31% $373,000 21.1% 5.1% 3.0%

Inner-city apartment resale values will (forever) be severely curtailed by the plethora of same-same neighbouring apartments that prospective buyers will reference as evidence to avoid paying any more than they need to in order to get a deal done.

The same can be said for tenants. Investors who mistake so-called ‘good neighbourhoods’ for ‘fundamentals’ often sight the nearby university and / or hospital as a reason for high rental demand. But the reality for West End and South Brisbane is that a whopping two-thirds of dwellings in the suburb are part of the local rental pool, there is very high turnover of tenants and the lack of market pressure means that rents do not grow.

While the glitz and glamour of inner-city apartment life within a capital city will always appeal to some, lifestyle is as subjective as steak, chicken or fish. It is not a fundamental!

Property investors now have more than a decade of evidence confirming that apartments are a grossly under-performing financial instrument.

 

Related article: Australian real estate decade in review

 

For less than the cost of a typical 2-bedroom, inner-city apartment, one could invest in a standard suburban house in umpteen major regional cities throughout Australia.

Over the last 5-years, these locations have produced higher rates of capital growth than every capital city other than Hobart, rents have also increased nicely, and rental incomes cover all of the annual expenses.

 

Engaging the expertise of a professional who can skilfully analyse the market fundamentals of locations nationally enables everyday Aussie investors in real estate to have exposure to opportunities outside of their hometown along with removing emotion from this very important decision-making process. Contact us here

The moral of the story is that buying an investment property on the premise that … it’s a great neighbourhood and lots of people will want to live there…’ can easily be a recipe for poor financial performance.

Minimise the potential of getting wounded and work with someone with knowledge and expertise in this chosen field. The good ones will have some scar tissue of their own.

Propertyology are national buyer’s agents and Australia’s premier property market analyst. Every capital city and every non-capital city, Propertyology analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.

We walk-the-walk. Here’s a recent example of our work for a client.

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