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Investing in Property Hotspots

Thursday, October 04, 2012

Nine pieces of wisdom for finding and investing in property hotspots

By Larry Schlesinger
Thursday, 23 August 2012

Here is a quick list of nine pieces of wisdom to guide your thinking as you seek a property investment. Property Observer has cherry-picked some bright ideas and insights from some long-time property players.

1. Pick gems before they have gotten their shine

John Edwards, the Residex forecaster, says the best investor returns are made when you buy at the right price, in the right place and at the right time.

Edwards stresses investors need to keep in mind that locations that already have a reputation for being a hotspot have most likely passed their invest-by date by the time you actually find out about them in the published hotspots lists. The Residex boss says a current “gem” is just that – current – and the opportunity to maximise returns has passed.

2. Pick investments with an element of scarcity

The WBP Property Group chief Greville Pabst suggests investments ought to have high land value and an element of scarcity. He gives an example of buying an apartment in a period-era block of flats in an established suburb, where there may only be half a dozen apartments built on valuable inner-city land, versus buying an apartment in the high-rise apartment precincts, and obvious building construction hotspots, where you are likely to be the owner of one of 100 similar apartments in the same development.

3. Look for nearby employment opportunities

Investors should look for nearby employment opportunities for tenants and/or owner-occupiers that are easily accessible, says PRDnationwide research director Aaron Maskrey. He says it’s essential for incoming residents to be able to source employment within the local region. Don’t just peruse the property websites, monitor the employment internet sites.

4. Don’t rely too much on population growth data; vacancy rates provide a better guide

An increasing population indicates work opportunities, investment in infrastructure and demand for housing, but according to buyers’ agent Catherine Cashmore, it does not always result in the best long-term capital growth.

Cashmore says it is always important to analyse the reasons behind any surge in population and conduct an assessment on the longevity of the move before committing to a purchase.  The approval of “mooted” residential developments is the first risk that must be evaluated to protect against periods of oversupply of any one type of accommodation, she says. Jobs are transitory and because workers choose only to rent, when the work dries up, the majority don’t hang around.

Cashmore says as a general rule investors should try and seek out those areas where turnover is low, with a good proportion of owner-occupiers to renters and a diverse range of accommodation. The 2011 census gives good insights.

5. Look for locations with good infrastructure

 

Investors should look for locations with good access to public transportation and nearby arterial roads/highways, PRDnationwide research director Aaron Maskrey says. He encourages investors to ask questions like: Is there new or improved transportation infrastructure? Is the area identified for future gentrification by local council? Is there a limited available supply of dwellings to meet current and future demand? What about planned developments in the area?

6. Heavily discounted properties are not always a bargain

At any one time every location across Australia has a significant amount of property stock where the price has been discounted. But just because the price has been reduced doesn’t mean the property is for sale at fair value. The property may still be overpriced.

SQM Research director Louis Christopher says some properties may still be overpriced, even if they have already been discounted by over 30%. Louis Christopher recommends investors disregard asking prices and instead focus on what comparable properties actually sell for to figure out if a property is overpriced, has met the current market or is at under market value.

7. Focus on the property, not the hotspot

You are buying a property, not a whole town or suburb, says Property Observer editor Jonathan Chancellor.

While hotspots provide a guide as to where to look, you should not let them narrow your field of vision. Excellent investment opportunities can appear within markets that are not themselves hotspots, they may even be in decline. The key is to focus on the underlying value of the property itself and its potential for capital growth and rental returns, depending on your investment outlook.

8. Look for signs of the next “Paddington” and trust your intuition

John McGrath, CEO of McGrath Estate Agents, says he does not look too closely at the finer details but instead looks for a feeling or indicators that a suburb is on the move. He looked at Paddington in Sydney many years ago when it was a virtually unwanted location. It proved over a 10 or 15-year period that it was one of the fastest growth suburbs in Australia.

Looking back, McGrath says he saw a suburb close to the city, of medium to high density property, with a lot of people wanting to get in there, from types of buyers that pushed prices up significantly. He recommends looking for the next Paddington in their particular marketplace, which really comes back to having an intuitive sense along with doing your research.

9. Sometimes it’s best to just do nothing

Bear in mind this quote from Warren Buffett: “The trick is when there is nothing to do, do nothing.” Yet many investors get itchy feet and want to do the deal.

There are stages in the property cycle and times in your investment journey when it is best to just sit back and wait for the right opportunities to come along, because wealth is the transfer of money from the impatient to the patient.

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