You’ve heard the term gentrification, and you may even have an understanding of what it means.
But for investors, gentrification takes on a whole new meaning – as it actually represents a powerful opportunity to increase both your property returns in the short term, and your overall real estate wealth in the long term.
Let me explain how.
I’ve discussed many times the fact that there is no such thing as one property market in Australia – instead, there are multiple property markets, each with their own specific drivers and fundamentals.
While each state has its own property cycle, suburbs have their own cycles as well.
Yes, there are suburbs where something different is going on.
What is gentrification in real estate?
The suburbs are gentrifying means that they are going through a period of improvement.
Many people misunderstand what gentrification really is.
Getting an upgrade in infrastructure, or a new Coles supermarket or Bunnings or some new shops in the area is not gentrification.
As an investor and a Property Strategist, I look for areas that are going through gentrification because these suburbs have their own cycle of growth independent of what’s happening in the broader market.
In general, capital growth in these areas will outperform the averages.
These areas go from and ugly ducklings to a beautiful swan and therefore the homes in these suburbs increase in capital value faster than the average.
As a property investor, if you can identify an area at the earlier stages of gentrification and buy while prices are more affordable – you stand to benefit from ongoing capital growth.
How (and why) does gentrification happen?
One of the most significant changes in the way we live in Australia over the last few decades has been the gentrification of our inner suburbs.
When I was young, housing in the inner suburbs was cheap as home to the working class and migrants.
These inner suburbs teamed with single-fronted terraces, pubs and factories.
But within a few decades, the process of gentrification saw these ugly duckling suburbs transformed into graceful swans as higher-income households displaced blue-collar workers; changing the character of these neighbourhoods and resulting in a significant increase in local property values.
What caused this gentrification?
One of the main factors behind this revitalisation was the exodus of manufacturing to the suburbs, driven in part by cheaper transport and better roads.
At the same time, many migrant workers departed to the suburbs to live in detached houses with front and back yards.
Interestingly at around the same time, our society started to experience higher education levels, which necessitated more people being closer to campuses.
These were usually in or near the CBD, and so being close to the city became more desirable.
The diversity of serviced-based jobs located in the CBD, together with the increasing number of women in the workforce and declining household sizes, all made the prospect of living in those smaller properties near the city more attractive to a larger cohort of potential buyers and renters.
Of course, it should come as no surprise that this increasing demand led to house prices in the inner-ring rising much faster than in the outer suburbs.
How to identify a suburb going through gentrification
Gentrification is a change in the fortunes of a suburb as it is discovered by a higher income demographic, which slowly pushes out the lower-income residents.
The word gentrification comes from the old English Gentry where more affluent people move into an area.
This usually occurs where working-class people, tenants and migrants move out as the land becomes too valuable and more affluent people move in renovating the old homes and improving the surrounding shops.
These new, more affluent residents invest time and money improving their new neighbourhood, pushing up prices and rents.
So how do you spot a suburb that is in the process of going through this metamorphosis?
One unusual and unexpected property research strategy to help in this regard might be through look at the dogs walking around the neighbourhood.
Yes, you read that correctly – I am suggesting that you look to the dog breeds for a sneaky clue!
I recently read this fantastic article about the three stages of gentrification, according to dog breed and I tell you what – they’re not wrong.
It might be a light-hearted spin on gentrification, but there’s a lot of truth in humour!
In the article, the writer shares:
There used to be two types of dog prevalent hereabouts: small, short-haired yappy things that belonged to old anglo-Aussies; and small, fluffy yappy things that belonged to old Greeks and Italians. You only knew these dogs existed when they ran up to a front gate and yapped at you (unless you lived next door to one, in which case you heard them yapping all the time).
One of the first signs of gentrification was the appearance of blue heelers riding shotgun in beaten-up utes driven by sculptors freshly graduated from art school. That was a long time ago now; the sculptors have grown up and moved to workshops in the outer-urban factory belt, where their cattle dogs chase tiger snakes in the outer-urban creek valleys.
The second canine wave was an influx of the dogs young couples buy just before they have kids: usually some kind of whatever-doodle: a practice dog for people who want to learn how to take responsibility for another creature before an actual human child’s life depends on them.
“The latest wave is a direct result of the property developers’ vision: they are the dogs who live in the dog box apartments (sorry), companion animals for young singles who can probably barely take care of themselves.
Of course, I’m being a little tongue in cheek here and in a few moments, I’ll share a more strategic approach to help you identify a gentrifying suburb (along with an example).
But first, a note on the unintended impact that comes about when suburbs go through this transformation.
The process of gentrification and rising prices has in the past locked a generation of younger people out of inner-city housing, and it is likely that the gap will only widen over the years.
When a suburb is gentrifying and an area loses its stigma, and more individuals on higher wages move in, this puts further upward pressure on property values and it makes homes in the area even less affordable to its previous residents.
I’ll leave a discussion of the remedy for this to the politicians and town planners.
Homeowners and landlords take a different approach to each other and have different outcomes in mind, so the conclusion for property investors here is that if you want to own the type of property that will outperform the averages, the inner and middle-ring suburbs are the place to be.
Looking back, one of the significant transformations of our inner suburbs was that household incomes grew significantly as residents were better educated and had higher-paying jobs.
Two incomes in a household instead of one meant that people had more money to spend on housing – and spend it they did!
Example of gentrification: Redfern, NSW
Gentrification has occurred in the old working-class inner and port suburbs of many of our capital cities in the 1990s and 2000s: think of Port Melbourne and St Kilda in Melbourne, and Balmain and Redfern in Sydney.
A great example of a recent gentrifying suburb is Redfern in Sydney’s inner city. Just twenty years ago, Redfern was considered a seedy neighbourhood.
Crime rates were higher, unemployment levels amongst local residents were higher, and it was generally considered to be a “dodgy” neighbourhood.
|Median property value 2020||$1.5m||$920,000|
|Median rental return
|Capital growth in 10 years
What happened between 2010 and 2020?
Well, in reality, the process of gentrification started earlier – perhaps a decade earlier.
As the suburb’s proximity to the CBD and all of the appealing local amenities drew a more affluent crowd to live there, the dynamics of the suburb evolved.
The people moving in had better jobs, higher incomes and more employment stability.
Stats from the Bureau of Crime Statistics and Research released in 2010 revealed that in the two years to September 2009:
- Robbery without a weapon fell 27.6 per cent;
- Robbery with a weapon, not a firearm fell 48.8 per cent;
- Motor vehicle theft fell 29.6 per cent; and
- Steal from a person fell 36.8 per cent.
Overall, the suburb was on its way up – and those who bought in the area during that gentrifying period benefitted many times over.
So what is the key to identifying a gentrifying location, one where property values will increase above average?
First, you need to find suburbs where incomes are growing, increasing people’s ability to afford and pay higher prices for property.
Digging into the Census data shows that while wage growth has been slow over the last few years, there are some suburbs where wages have grown 20-30% more than the State’s average.
You’re likely to find these suburbs are home to a number of other identifying features of gentrification such as top-end cafes or restaurants as well as higher-end stores where the wealthier population can spend their money, because that's what they generally do.
Not surprisingly, household sizes tend to be smaller in these locations with more interest from empty nesters, young professionals and DINKs (Double Income, No Kids).
The secret to identifying gentrification, therefore, involves researching locations where a number of economic factors are changing at the same time.
To make things clear: just because a suburb has cheap properties, that doesn't mean it's destined to become the next growth area.
Some suburbs are inexpensive for a reason and won’t improve because of various socio-economic factors.
There might be too much industry in the area, a lot of social or public housing or possibly an ongoing crime, gang or drug problem.
Or maybe they are outlying suburbs with poor infrastructure, facilities or public transport, and little prospect for change.
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On the other hand, the type of suburb to look for is one that is relatively cheap today but has the potential for future capital growth.
Some of the major drivers of capital growth are:
- Proximity to the CBD or the water.
- Adjoining a more expensive neighbourhood so it can benefit from the ripple effect.
- Desirable amenities such as good public transport, a large shopping centre, or within the catchment of a highly prized public school.
- Older attractive houses with character features, that are ready to be renovated.
- Areas where governments are investing in local infrastructure or beautification programs.
Research at a micro-level: what do you look for in a suburb?
Some of the steps you can take to find a suburb that is improving are to go for a drive and a walk.
You’ll “know it when you see it” because you’ll find evidence that people with money are moving in.
- They will be spending large amounts of money renovating or extending their homes.
- There will be white (the new black) SUV’s parked in the driveways, rather than old Ford Falcons and Holden utes.
- The nature of the shops will be changing. The gyms are offering Pilates; the cafés sell cold press coffee; and the deli’s serve goat’s cheese pizza.
- Gentrifying suburbs will be in the inner and middle-ring suburbs of capital cities, where people of higher social status want to live (within around 40km of the CBD).
As a property investor, if you can pick an area going through gentrification, one that’s shifting from dreary to in demand, you stand benefit from its accelerated growth.
And the good news is that you don’t have to get your timing perfect – the gentrification process lasts a number of decades.
The 6 stages of gentrification
Gentrification is the rebirth of suburbs in the middle and in rings of our capital cities.
Suburbs going through gentrification transform at a different rate than the broader property cycle.
They are transformed by the renovation of the existing properties and the building and development of new properties – often medium density – together with the transformation of the shops and amenities in the area.
Now, I don’t like talking about hotspots, because these tend to be short-term areas of growth, but if you dig deeper you can see that area to gentrifying really are long-term capital growth hotspots. This is accompanied by more affluent people moving into the area.
To be clear, gentrification is a process of various stages that occurs over a number of decades.
As with all things real estate, change often starts with people.
This can involve people getting together to discuss the changes needed in that specific location.
Keep an eye on council or chamber of commerce meetings to keep abreast of any future planned changes.
This is the stage where planning comes in and developers, government entities and the local community often become involved.
Plans are drawn up, objections heard and any changes to the plans are considered at this point in the process.
Now is the time to look for any new innovative developments or community infrastructure such as new residential communities, hospitals, schools and rail or road projects.
Significant developments can have a big impact on an area, especially on such things as its lifestyle and employment opportunities.
As well as state-of-art developments, there may well be intensive development happening.
This may include a new specific precinct, such as doctors’ rooms, which are an addendum to a new hospital.
The installation of such zones often brings skilled workers to the area, who earn more money and help to progress gentrification of the suburb.
At this later stage, you often start to see population movements, which may include socio-economic changes.
So the lower class becomes the middle class and the middle-class becomes the upper class.
It is when higher wages are a normal part of the suburb landscape that we start to see property values grow.
Things you should look for are:
- Are the number of children aged under 19 years of age decreasing faster than the state average?
- Is the local population getting younger? The number of older people should be decreasing faster than the state average.
- Are there more affluent two people households? Is the number of couples without children increasing faster than the state average?
- What are the educational qualifications of the residents? Are there a larger number of people with tertiary education? Are there more professionals?
This stage is where gentrification of an area really takes off!
When a large number of affluent people choose to move into a suburb, they often start to spend a great deal of their resources progressing the gentrification trend.
Thus the gentrification of the suburb goes viral (in a good way) because these new wealthy residents are spending a lot of their money in their new community.
Of course, the process of gentrification is most common in a city’s inner- and middle-ring suburbs.
Don’t worry if you’ve missed the first stages of gentrification of a suburb.
As you can see the complete process takes a number of decades and even if you get in late at stage five or six of the process, there is still considerable above average capital growth likely to occur.
And that is because the suburb has now been transformed to a “destination” – a place where people want to live, congregate and visit.
There are six relatively clear stages of gentrification, which you should understand so you can spot the next suburb about to undergo this modern metamorphosis.
Location, location, location…
Another key factor to keep in mind with all real estate decisions, but particularly when you’re looking for a gentrifying suburb, is the location.
We all know that location does 80% of the heavy lifting of the capital growth of your investment property.
And as I’ve explained, you can find a property that outperforms the average capital growth by finding an area that is gentrifying.
You can then add even n value and increase the tenant and rental appeal by renovating or redeveloping your property.
However, one of the mistakes I’ve seen investors make is buying their property to renovate in an area that isn’t exhibiting strong long-term capital growth.
What this means is that they may make a one off financial gain by manufacturing extra value and increasing their property’s rental appeal through a renovation, but that’s where the benefit ends.
If the location isn’t growing in capital value strongly, and if the area is not gentrifying, then you are not getting the multiplier effect – which will ensure the property increases in capital value and in rental value also.
Just to make things 100 per cent crystal clear: gentrification is about people, not property.
It is the trend that aspirational people of higher social status move into a neighbourhood and transform it.
So if you want to own the type of property that will outperform the averages, and profit from gentrification, it’s this inner sanctum of suburbs that’s the place to invest.
They’re what I call the “destination suburb:” a location where people want to go and want to be seen.
Where there are a lot of things to do locally – the locals don’t want to travel far and they want everything to be within 20 minutes of where they live.
They also like to live in the suburbs where their brand image is strong and where the vibe and the action is.
They like to show the latte they bought at the local café on Instagram or Facebook.
Think Bondi in Sydney… People want to go there for the lifestyle and to do things.
They can go to the beach, the cafés or buy a Bondi Burger.
They are happy to be associated with the Bondi “brand”. They’re even TV shows about Bondi such as Bondi Vet and Bondi Surf Rescue.
While not all gentrified suburbs will have a brand yet, they eventually will become destinations that people will want to associate with.
Think Elwood in Melbourne, or Teneriffe in Brisbane.
Choosing suburbs that are going through gentrification is one of the strategies we use to outperform the market.
The system that we use at Metropole, which has helped many clients build substantial property portfolios, uses what I call a top-down approach (going from the macro to the micro).
This starts with examining the macro factors affecting our property markets and drills down to the micro level.
- We start by looking at the big picture – the macro-economic environment.
- Then we look for the right state in which to invest. One that will outperform the Australian market averages because of its economic growth and population growth.
- Then within that state we look for the suburbs that will outperform with regards to capital growth.
We’ve found some suburbs have 50 to 100 per cent more capital growth than others over a 10-year period.
Obviously those are the suburbs we target.
Often these are gentrifying suburbs and it’s all about demographics.
These will be areas where more owner occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price to live because they have higher disposable incomes.
In general these are the more affluent inner and middle ring suburbs of our big capital cities these suburbs tend to be areas where more owner-occupiers want to live because of lifestyle choices and where the locals can afford to and will be prepared to pay a premium to live because they have higher disposable incomes…
- Then we look for the right location within that suburb. Some liveable streets will always outperform others and in those streets, some properties will always be more desirable than others.
- Then within that location, we look for the right property. And finally, we only buy at…
- The right price, but we’re not suggesting a “cheap” property – there will always be cheap properties around in secondary locations. I mean the right property at a good price.
How do you know which is the right property to buy in gentrifying suburbs?
We follow my 6 Stranded Strategic Approach and only buy a property:
- That would appeal to owner-occupiers. Not that we plan to sell the property, but because owner-occupiers will buy similar properties pushing up local real estate values. This will be particularly important in the future as the percentage of investors in the market is likely to diminish
- Below intrinsic value – that’s why we avoid new and off-the-plan properties which come at a premium price.
- With a high land to asset ratio – that doesn’t necessarily mean a large block of land, but one where the land component makes up a significant part of the asset value.
- In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area or a suburb going through gentrification.
- With a twist – something unique, or special, different or scarce about the property, and finally…
- Where we can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to do the heavy lifting as we’re heading into a period of lower capital growth.
By following my 6 Stranded Strategic Approach, you minimise your risks and maximise your upside.
Each strand represents a way of making money from property and combining all six is a powerful way of putting the odds in your favour.
If one strand lets you down, they have two or three others supporting their property’s performance.
When you look at it this way, buying a property strategically takes a lot of time, effort, research and something most investors never attain – perspective.
What I mean by this is you can gain a lot of knowledge over the Internet or by reading books or magazines but what you can’t gain is experience.
It takes many years to develop the perspective to understand what makes an investment grade property.