One of the more common property investment questions that I get asked is, “What’s hot?”
Now, I happen to think that is the wrong question.
What the investor really should be asking is, “What should I buy?”
And for mine, the answer comes down to understanding three simple concept:
- Space versus place
- Density needs to be offset
- Who lives where?
‘Space versus place’
There is a strong trend in many western countries, including Australia, to accept less private dwelling space in order live in a better location or place.
This occurs because it is more expensive to live in a better location i.e. inner city or on a high-street, when compared to most suburban settings.
This is particularly the case when it comes to the rental market.
A premium is paid by renters to live close to the action.
Established areas with great amenity are in high demand. Smaller dwellings (& allotments) are more readily accepted in such locations.
This ‘space versus place’ trade-off is an important investment concept.
‘Density needs to be offset’
An extension of the ‘space versus place’ concept is that ‘density needs to be offset’.
What I mean here is that medium-density dwelling supply just cannot happen anywhere (despite what some developers & far too many town planners may think), & that closer living must be offset by being closer to amenity first, then convenience a distant second.
It is very hard to successfully¹ develop townhouses, for example, in a middle-ring, unless they are adjacent to quality open space; are within a short walk of a well-established retail/dining precinct and/or have an elevated position with long-range views.
Being close to work, major public transportation & convenience shopping helps too, but it’s the quality of the local amenity that comes first.
The same concept applies in inner city locations, where urban density is often highest in areas with more amenity i.e. high-streets; riverfront or waterside locations.
Increasing the density because an area has good public transport or is close to employment doesn’t seem to work.
An area needs to be attractive to live in & the higher this attractiveness, the greater the appetite for additional density.
So in short, the higher the density, the better the local amenity needs to be.
Meaning, in both cases, that the property attracts rental premium & investors resell for a capital gain.
‘Who lives where?’
This simply means understanding the local demographic make-up of an area.
Five measures count in this regard – household composition; housing types; bedrooms; cars & tenure.
For this missive, I have broken Brisbane (as a case study) into three areas – inner city (within 5km of the GPO); middle-ring (5km to 20km of the GPO) & outer suburbs (beyond 20km of the GPO).
When it comes to household composition, 80% of inner Brisbane’s households don’t have children living at home.
This drops down to 50% in the middle-ring suburbs & down to 40% across outer Brisbane.
Most housing in the inner suburbs is attached (70%); compared to 10% across Brisbane’s middle-ring & 5% in the outer suburbs.
Two-thirds of inner Brisbane dwellings have just one or two bedrooms.
Whilst in contrast, 85% & 95% of the homes across Brisbane’s middle-ring & outer suburbs, respectively, have three or more bedrooms.
A similar trend applies to car ownership with 70% of inner Brisbane households owning one or no car.
Most other Brisbane households have two or more private vehicles at home.
Finally, as one would expect, the most common dwelling tenure downtown is renting (65%) compared to 35% across middle-ring Brisbane & 25% in the outer suburbs.
To some this might be blindingly obvious, but to many others it cannot be all that clear at all, especially given the investment properties they have bought.
In summary, you are always better buying an investment property that suits the local demographics & in particular a property that best suits, at least, two local rental demographic subsets.
What does this mean to investors?
If looking to buy an inner city investment property, seriously consider one & two-bedroom apartments.
Putting aside design issues & price for the moment (we will cover this in next week’s missive), an investor is really buying ‘place’ here.
Make sure the property you are buying is in an established, high amenity area.
Also, be careful that the amenity you are buying cannot be built out or substantially changed in the future.
When it comes to buying in the middle-ring – where an investor is buying a combination of ‘space & some place’ – often three-bedroom townhouses, plexes or small-lot homes do the trick.
Again, focus on the local amenity first & convenience second.
If the outer burbs are more your flavour – and let’s face it, investing for too many buyers, is as much an emotional decision as one based on facts & figures – (I know many baby boomer investors, for example, who, in spite of all the logic, cannot bring themselves to buy a one-bedroom apartment – they aren’t comfortable with the concept – and opt to buy townhouses or small-lot housing instead) – then buying a four-bedroom detached house is usually the better investment option.