Is buying a blue-chip inner city pad better than the blue sky of a regional property?
It’s a question often asked by investors, is it better to negatively gear in a blue-chip area, or purchase something more affordable, but perhaps with less chance of capital growth, in a regional location?
This debate goes around and around in circles but one thing’s for sure when it comes to investing- all locations, no matter what part of Australia- have potential for capital growth and solid returns if the fundamentals stack up.
There’s probably more reason than ever to debate the blue-chip versus the blue sky of regional towns strategy right now.
Over the past year, capital cities have boomed, leaving regional areas behind.
But is there any more growth in them to come?
Or is it time to focus on the outskirts of the cities and perhaps ventures back to tourism destinations?
Residex founder John Edwards says there are pros and cons for both.
Despite Sydney experiencing a massive property boom in 2013, and other capital cities also showing solid gains, Edwards believes there’s still more room for growth this year and the blue-chip locations will outperform other city suburbs over the next five years.
“When you look at the suburbs in (blue-chip) list, you can see that they’re in the upper socio-economic suburbs.”
“The blue-chip suburbs are undervalued at the moment. They’ve lost their value compared to the rest of the suburbs in cities. I suspect that the upper socio-economic group is more likely to be highly educated and more aware of what’s going on. They’re more likely to have been hurt by the GFC.”
As the economy starts to improve, homebuyers in this area will start to feel more confident and perhaps upgrade.
So while the ‘burbs had a strong year in 2013, it’s those areas people aspire to live in that should really outperform in the future.
BLUE-CHIP IS BEST
Not everyone can afford a property with a million dollar price tag, but Edwards believes investors who can purchase in aspiring suburbs will do well over the next five years.
Sydney suburbs Bellevue Hill, Rose Bay and Mosman top the blue-chip hotspot list for homes, while Malvern and Elwood are also predicted to outperform in Melbourne.
Similarly, the riverside suburbs of Bulimba and New Farm in Brisbane are expected to shine in the sunshine state.
If you don’t have the cash for a prized pad in one of the country’s best suburbs, consider the more affordable, but still competitive, unit market.
That’s Elwood, St Kilda and Richmond in Victoria, or North Bondi and Milsons Point in Sydney.
Subiaco, Claremont and West Perth in Western Australia take out three hotspot locations in the unit list, while West End and New Farm in Brisbane round out the numbers for Queensland.
They’re all blue-chip locations that are safe bets for your retirement nest egg, according to Edwards.
“These are suburbs where there’s limited supply.
“It’s still a high cost to get into the unit market but they’re in good positions. You can’t redevelop these areas or create more supply.”
He adds lost if the blue-chip unit markets have older style blocks. They’re built well, usually larger in size and considered ‘boutique’.
“To infill these areas, it’s difficult. The blue-chip (unit) suburbs in Melbourne aren’t like the rest of the city where there’s oversupply.”
Units in New Farm and West End in Brisbane are still quite affordable, Edwards adds.
“These suburbs might not ‘boom’ but they should at least have an annual growth rate for four per cent over the next few years.
“Brisbane overall is the suburb I’m most comfortable with, in terms of it doing well,”
“I think it’s undervalued, relative to other cities in Australia. It should do well because of its economic future credentials.
Overall, I think Brisbane is probably where the best growth will occur over the next decade.”
Edwards suspects the big winners when it comes to property investing over the next five years will be regional towns, especially in New South Wales.
He defines a regional town as “anything outside the metropolitan area of a capital city.”
Blue-chip locations might be a sure bet but they’re also incredibly difficult to buy in, especially while some capital city markets are booming.
They might have had a fantastic run over the past 18 months, but Edwards believes the tables are likely to turn. Edwards explains:
“I think regional areas will outperform Sydney. What will happen is that capital cities will become unaffordable and the young will be forced to leave and seek employment in regional areas,”
“We’ll see small businesses and activity being development, in regional areas.”
Destiny founder Margaret Lomas agrees:
“As technology continues to advance and employers being to offer more and more flexible working options. I predict we’ll see more people begin to choose areas to live in which afford them the lifestyle choices they crave.
“This means they’ll live in regional and outer areas where they can get good schools, access to sporting options and other cultural events. This will see pressure placed on those regional areas which are ready for this.”
Areas north of south Sydney are predicted to show strong growth over the next five years as more buyers are priced out of the state’s capital.
Wollongong, in particular, has reasonably good transport and yet surprisingly, it hasn’t seen much growth over the past decade,
Edwards believes Wollongong is “grossly undervalued”.
He says it’s yet to play ‘catch up’ and is therefore likely to experience 10 per cent growth per annum over the next five years for both houses and units.
“We’re going to see growth there because of investors and homebuyers looking for more affordable housing,” he explains.
“We’ll see city dwellers move to regional areas.”
The Real Estate Institute of New South Wales (REINSW) recently reported a huge fall in rental property available in Wollongong.
REINSW president Malcolm Gunning says.
“Wollongong vacancy rates have hit lows last seen almost three years ago, with a decline of 0.8 per cent to 1.5 per cent,”
“Wollongong is an attractive proposition for those who wish to relocate from Sydney.
Its beachside location if a more affordable option for those who are seeking a more relaxed lifestyle and this is putting pressure on a number of properties available.
“Across the Illawarra region, vacancy rates are also 1.6 per cent, down 0.5 per cent.”
Surrounding areas in Southern Highlands (Bowral, Kiama and Moss Vale) could also make a comeback and see growth of at least eight per cent per annum, thanks largely to a new airport in Sydney’s west. Kiama also has added bonus of a high rental yield of more than six per cent.
“The Southern Highlands will get more tourists,” Edwards says.
“You’ll find more investors will go there and upper management will also be looking at the Southern Highlands.”
It’s not just the south likely to experience a rush of priced-out Sydney homebuyers and investors.
Like Wollongong, Edwards is certain the suburb of Merewether in Newcastle will reward investors over the next five years and see growth of more than 10 per cent per annum.
That’s because Newcastle is much cheaper than Sydney, yet it has a strong economy and employment opportunities. Edwards explains:
“It hasn’t seen the growth value it should’ve sees in the past decade,”There’s also a major hospital, university and school in this area, along with shopping facilities, and a train line currently being upgraded.
Halfway between Sydney and Merewether, Edwards has listed the suburb Terrigal. He thinks Terrigal, and the Entrance for that matter, are both “grossly undervalued” and more young families will move to these areas as they’re pushed out of Sydney.
It comes down to lifestyle
Property buyer investment specialist Kevin Mason says it comes down to lifestyle.
He’s currently negotiating to purchase an architecturally-designed $750,000 property for a couple moving near to The Entrance. That same property would cost at least three times more in the outskirts of Sydney, he says.
“Everyone is now moving back to the regional areas. It’s about affordability and lifestyle and there’s still very good employment,”
“In years gone by, everyone wanted to be in the city but now it’s changing again.”
And if you’re not keen on moving north, even further west of Sydney, around Katoomba in the Blue Mountains, is predicted to become more popular with families, Edwards says.
“All the outlying areas that have nice surroundings and where children can be brought up. Those looking for houses will go there,” Edwards says.
“You get to the Blue Mountains and it’s grossly undervalued.”
South Morang, located 23 kilometers north of Melbourne, is the only Victorian regional area to make the list. Its train station connects to Melbourne’s CBD and Plenty Road takes commuters into town.
More homeowners will move there and buy units as they’re pushed out of Melbourne’s CBD, according to Edwards.
Those who timed the mining boom correctly were able to make a small fortune.
Over the next few years, investors who purchase along coastal areas might also be rewarded, as tourism towns make a comeback.
Edwards believes the Gold Coast will shine again, but suburbs where there’s less oversupply further south are more likely to benefit.
Kingscliff and Tweed Heads, just south of the border, have a predicted annual growth rate of eight per cent over the next five years.
“It’s a developing lifestyle and leisure centre on the New South Wales north coast,” he says.
“It’s a tourist destination that provides beach and estuary access for swimming, surfing, fishing and water sports.
Agriculture is one of the main land uses in the Tweed Shire, thus providing locals with employment opportunities.”
There’s also a large commercial and industrial precinct in the area, and investors and homebuyers have the benefit of nearby Coolangatta airport.
Edwards adds the strong Australian dollar, improving tourism and proximity to the Gold Coast will help this market. Agriculture is also one of the main land uses in the Tweed Heads South.
Edwards has also pinpointed the Sunshine Coast unit market as having potential for growth.
Noosaville, near Noosa, will be the best performer, he says.
“I think it’ll well and truly overtake the Gold Coast,”
“There are limits on the volume of units that can be developed there.”
QM Properties sales manager Damien Ross adds two major infrastructure projects have sped up momentum on the Sunshine Coast this year. He says.
“At the end of last year, stage one of the Sunshine Coast University Hospital opened, and the State Government started buying up land for the Sunshine Coast airport runway expansion,”
“In the market of the past few years, buyers have been fairly conservative, but now that these projects are moving forward, confidence has returned.”
The hospital will open with about 450 beds in 2016, while the Sunshine Coast airport expansion will allow for international flights.
The precinct is expected to generate 5000 new jobs and inject about $1.6 billion in regional economic benefit between 2015 and 2050.
Other areas around the country will also benefit from the return to tourism towns.
Edward predicts Dunsborough, near Bussleton in WA, will have eight per cent growth annually over the next five years, based on the fact tourism areas such as Margaret River are becoming popular again.
The area was given the WA 2013 Top Tourism Award for a population under 5000.
“During the past decade the town has grown quickly and become quite affluent. Consequently cafes and boutique stores have popped up everywhere,” Edwards says.
“The town’s location in Margaret River wine region provides easy access to many wineries and breweries. It’s also a favoured destination for annual school levers in WA.”
A WIN FOR AGRICULTURE
Narrogin is in WA’s Wheatbelt region, about 200 kilometres from Perth.
Edwards says the area’s previous role was as a major railway junction, but it’s recently accumulated significant public infrastructure, including health and education areas.
It’s also a huge agricultural hub.
“Agricultural areas are going to do well because the drought is over and the Asian economy will require more Australia produce,” Edwards says.
Mining areas might start to become less popular, although Edwards notes South Mackay and West Gladstone should still perform well over the next few years, as these mining areas are much larger and will act as a supply base to the region.
“They’re what I call the regional support towns for large development,” Edwards says.
“Mackay is also the gateway to the Great Barrier Reef and agriculture there is also strong. The diversity of its economy makes me feel comfortable.”
SO, WHAT’S THE DECISION?
Like all purchases, investing all come down to an individual’s wants and needs, along with the area’s fundamentals.
You might prefer the safety of a blue-chip location but also need the cash flow a regional area is more likely to provide.
Whatever the case, there’s always potential for solid growth if you select well. Lomas explains:
“It’s always the growth drivers, no matter whether you’re looking at city or regions,”
“What factors exist to ensure that you get over the above normal market movements? What’s going to take an area from low base to a boom? Most blue-chips are past this and simply respond to market sentiment.
“Sustained average growth rates- areas which are a little undiscovered- are always the ones which offer the best medium-term growth, if they have the growth drivers in existence.”
This article first appeared in Australian Property Investor Magazine – Australia’s #1 Magazine for property investors and is republished with their permission.