A quality property investment is not dictated by prestige or price, but by growth and returns
Thursday, 13 February 2014
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People often fail to see value if they can’t relate to the setting.
In 2007 a Grammy Award-winning musician - violinist and conductor Joshua Bell - stood in a metro subway in Washington DC and played for 45 minutes on a $3.5 million Stradivarius. Over 1,000 people walked past. Only seven stopped, briefly, to listen. A three-year-old boy was the only person who paid any real attention to the world-class violinist, who two days earlier had sold out a concert hall in Boston at $100 a seat.
This experiment, conducted by a newspaper columnist, created quite a stir at the time, for all sorts of reasons. One was that people generally assumed the musician was no good if he was busking in a railway tunnel. They failed to recognise the quality because of the setting. They missed a unique opportunity for a free concert from one of the world’s best musicians.
The story has real estate parallels. Most investors fail to recognise the quality in property that’s in a setting that doesn’t meet their expectations. Real estate snobs often miss the best investments because they think quality means expensive.
Why would anyone want to live there?*Is often heard from people who personally would choose somewhere swankier. The answer, not that they ever stop to hear it, is: lots and lots of people, for all kinds of valid reasons.
Sydney is strong right now and the pattern of sales activity suggests further price growth in 2014. The list of locations recording the greatest increases in sales is dominated by more affordable areas. The municipalities of Blacktown, Parramatta, Canterbury and Bankstown lead the Sydney pack, although the City of Sydney also has plenty of activity in its apartment markets.
Blacktown City is the individual star. It has a dozen suburbs with strongly rising market activity. This is the population growth leader in New South Wales and one of the most popular areas for first home buyers. It offers affordable homes, good infrastructure, strong transport links and proximity to major jobs nodes.
For these and other reasons, more people are buying there than in Vaucluse or Mosman. Many people aspire to live in those silvertail suburbs but that aspiration does not translate into market demand because relatively few can afford them.
Price growth is driven by the weight of mass demand and, overwhelmingly, the great bulk of buyer demand goes to the places with attainable prices. Affordability rules in real estate. Affordability plus infrastructure (such as commuter train links) is one of real estate’s power combinations.
Quality in property investment is not dictated by the luxury features of the property or the prestige of its setting. It’s defined by superior capital growth rates and stronger rental returns.
In Sydney, right now, quality is more likely to mean Blacktown than Balmain.
There are similar stories to tell throughout capital city Australia. In Perth, the average growth in 2013 was around 8-9% but many precincts did much better than that. They were not the millionaire enclaves west of the CBD beside the river or the beach. They were the affordable areas some distance from the City, including the municipalities of Swan, Gosnells and Armadale.
Closer to the CBD, but still relatively affordable, the municipality of Belmont also delivered strong price growth.
To be a successful investor, avoid the syndrome that was evident in the Washington experiment involving one of the world’s best musicians.
Terry Ryder is the founder of hotspotting.com.au.
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