It’s not size that matters, but how much you want it

Throughout the annals of property history, one constant facet of asset selection has often eluded beginning investors and that is -  what really pushes up the price of some housing, while other pockets languish in the ‘medians’ or are below par performers.

Often, those new to the property game think it’s all pretty black and white – buildings depreciate in value, while the land they sit on appreciates.

Ergo, the bigger the piece of land, the better investment it must make right.

Well, if it were really that simple, then a hundred-plus hectare parcel in outback Australia would come with a billion-dollar-plus price tag.

It might seem like a logical assumption to think that more land equals more profits, but markets are not always logical.

That’s because they’re based largely on the ebb and flow of human emotion or ‘consumer sentiment’.

Big, small, or something in between?

Not too long ago I read an article discussing the size and price of real estate in some prominent Melbourne suburbs.

The argument put forth was that smaller inner-city blocks command higher prices, compared with properties further out from the CBD.

The notion is just far too simplistic.

Yes, we are seeing that select inner-city properties are commanding a much higher price per square metre value, but it’s not because they’re smaller per se.

Rather, it’s to do with a little fundamental I talk about a lot when it comes to long-term performance of different locations – supply and demand.

How much do you want it?

Desirability is the biggest driver of consumer sentiment. 

If enough people covet the same thing badly enough, then that thing becomes valuable.

Add scarcity of supply to the equation and suddenly the growth potential of the particular ‘thing’ – in this case, developable land and character buildings in our major inner-city property markets –increases significantly.

So what drives our love affair with certain inner-city neighbourhoods, and why is scarcity such a big player in these same areas; where owner-occupiers vie for high-priced property and tenants are willing to pay a premium for the rental stock?

Why we like it

Our lifestyle and household make-up are changing in Australia.

Thirty or so years ago we traditionally lived in ‘average’ nuclear families of 4.5, nowadays though one and two-person households are becoming more common, and aligned with this transition, there’s been a dramatic social shift.

Cities once seen as dirty, industrial hubs for the working classes have morphed into lifestyle playgrounds for high-income earning, corporate ladder climbers.

Today it’s about cafes, culture, and easy access to amenity and infrastructure, as well as employment.

Drilling down further when it comes to asset selection as an investor, you need to know what makes these smaller properties more appealing.

What elements combine to increase the desirability of some areas and investments over others?

These include: 

• Proximity to popular lifestyle amenities, including beaches, cafes, and retail precincts.
• More convenient commute to the workplace, and better availability of healthcare, schools, parks, etc.
• Appealing architectural style, such as period or art deco facades that cannot be easily replaced or replicated.
• Features of the dwelling, like car parking, views, and aspect.
• Perceived ‘postcode prestige’ and the tendency for people with a similar social status to ‘flock together' in these localities.
• Easier to maintain the premises – internally and externally.
• Significant demographic trends, such as equity-laden baby boomers looking to downsize into smaller, quality accommodation that offers convenient access to public transport and other amenity found throughout inner urban areas.

When there’s not enough to go ‘round

When these aspects of asset attraction combine with key elements that give a property the rarity factor, you have found the proverbial pot of property investment gold at the end of the real estate rainbow.

Remember, it’s the combination of demand and supply working against each other that underpins performance.

So what does scarcity look like?

• Local supply of developable land has dried up and no more can be created due to natural, manmade and/or geographic constraints – think inner bayside areas girt by sea, or areas with heavy planning and zoning restrictions.
• Less ‘affordable’ property, with higher entry prices making these areas more attainable for the wealthy, as opposed to the ‘masses’.
• Character properties with architecture that cannot be easily replaced or replicated.
• Features difficult to come by in the inner city, such as off-street parking.
• Views of parkland or water.

 What it means for investors

Understanding the inherent supply/demand driver of our housing markets gives property investors the edge when it comes to selecting assets that will outperform in the long term.  

Given there are still large numbers of baby boomers yet to retire and downsize, and more young people looking to remain close to their work and the convenience of well-established infrastructure as well as lifestyle amenity, it’s unlikely our growing appreciation for inner-city hubs will wane any time soon.

With restrictive entry prices and the necessity to develop upwards rather than outwards all but sealing the deal on the growing trend toward smaller accommodation options, inner-city apartments are a smart property investment choice in today’s investor market.

Of course, you need to keep in mind that the scarcity factor, meaning the generic glut of complexes now hitting our major CBDs are not ideal – there are too many saturating the market all at once. You’re far better off looking for small boutique blocks, where character and charm are still abundant.

And remember it’s not just the size, but how useable and sought after space is that really counts.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.