Location, location, location!
I’m sure you’ve heard about the importance of location.
In fact, you've probably heard me say that the location of your property will do around 80% of the heavy lifting of its capital growth.
During the recent property boom, any and every property sold, but we’re now seeing a flight to quality across all markets as less competition, higher borrowing costs, and fears of falling property prices have made buyers more cautious.
That means it’s more important than ever for property investors to focus on investment-grade locations.
But what makes a great location for investment?
Factors that make an investment-grade location
There are many factors to take into account when looking for your next investment property, but if you do your research to find an investment-grade location, you’ll be well on the way to making a good investment decision.
These are some of the many factors the team at Metropole looks at when assessing locations in which to invest.
Demographics
The first factor to consider when choosing an investment-grade location is the demographics.
At Metropole, we look for areas where resident incomes are growing faster than the state average.
That’s because moving forward our property markets will be more fragmented - blue-collar areas and lower socioeconomic areas will suffer more from the ravages of inflation while those with stable and increasing incomes represent a more stable property market.
Supply and demand
While a lot of people suggest population growth is a key driver of demand for property, it is important to look at the supply side of the equation.
We like to invest in areas with a limited new supply of land or dwellings.
That’s why we like to invest in the inner and middle-ring suburbs of capital cities.
These areas benefit from high demand and limited property supply which leads to capital growth and rental growth.
In contrast, outer suburbs generally have an unlimited supply of land and new houses, which is the enemy of capital growth.
Employment opportunities
Employment opportunities are also a significant representative of a suburb’s investment value.
Investing in an area with strong job growth can increase demand for rental properties and the likelihood of finding long-term tenants.
If an area has a diverse range of employment opportunities nearby, it is more likely to attract and retain a population of working professionals and families, and this will maintain property values.
This will also provide a pool of reliable tenants.
Infrastructure and amenities
The availability of infrastructure and amenities is another important factor contributing to what makes a location “investment-grade.”
Infrastructure refers to the basic services and facilities that support the local community, such as roads, public transport, and hospitals.
Amenities, on the other hand, refer to the recreational and cultural facilities that enhance the quality of life in the area, such as parks, restaurants, and entertainment venues.
Areas with good infrastructure and amenities are more attractive to both owners and tenants, which can help to drive up both property values and rental yields.
After all, it’s all about the lifestyle and what we call a 20-minute neighbourhood.
Since the pandemic began, our ‘home’ is no longer simply the place we rest and enjoy some downtime between work and our social lives.
Now, the neighbourhood is more important than ever.
We’ve found buyers are willing to pay a premium for properties that are within a short distance of a great shopping strip, your favourite coffee shop, amenities, the beach, and a great park.
And as a result, these are the type of neighbourhoods that investors and wannabe homeowners are flocking to.
Walkability
Investment-grade locations with easy access to shops and lifestyle precincts with high walkability will remain in high demand moving forward and has already seen more than 36% growth over the past 5 years.
Beauty, amenities, services, and walkability are all key factors that help set a high-value investment-grade suburb apart from the rest.
As I mentioned above, the 20-minute neighbourhood is key, and if that infrastructure and amenities are within walking distance then it's even more valuable.
Gentrification
Gentrification is a process where a neighbourhood or an area is improved and redeveloped, leading to an increase in property values and slow displacement of older long-term residents due to rising housing costs.
This process often starts with the influx of middle or upper-class residents, new businesses, and amenities, which attract further investment and development.
It often happens in inner to middle ring suburbs which were initially overlooked, but have now become in higher demand as prices move out of reach in nearby suburbs.
You will see tired old warehouses or run-down shops in surrounding streets, starting to be given a new lease on life.
They may be transformed into a trendy café, microbrewery, or maybe a new hairdresser or bakery.
The demographics also start to change as the older retirees or social housing tenants start to move on and busy young professionals take their place.
As a result, we also see the average income for the location shift up a gear as this higher-income earning demographic moves in.
Gentrification can happen on a street level too.
The new demographic does not want to live in old, tired, run-down properties, so they start to make changes.
They renovate or knock down and rebuild to meet their appetite for a more contemporary home and to match the ever-changing, trendier landscape while developers transform the existing property into more modern and desirable housing.
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:Melbourne property market forecast for 2024
- Also read:Sydney property market forecast for 2024
- Also read:Brisbane’s property market forecast for 2024
- Also read:This week’s Australian Property Market Update – Latest Data, State by State April 23rd 2024
Gentrification is a positive factor for property investment because it brings economic benefits and improvements to an area which in turn creates more demand and therefore attracts higher prices for local properties.
Moving forward, we’re likely to experience a period of lower general capital growth, so I would recommend investing in areas that are gentrifying.
Attractive neighbourhood character
Another factor to take into account for an investment-grade location is those neighbourhoods that have undergone gentrification and now have an attractive neighbourhood character.
This adds value to the neighbourhood and results in higher local property values because people are willing to pay a premium to live in attractive areas.
Low crime rate
Whether you’re looking for your first home or an investment property, it is really useful to look at the property crime rates of the neighbourhood.
Areas with a low crime rate are far more desirable to live in than those with a higher crime rate - people are willing to pay more to live in a safe suburb where you can live without fear of crime on your doorstep and this higher demand helps to support property prices.
What are the different types of locations?
But, as they say in the ads, there is more to consider.
Not all real estate locations are equal and just like there are different precincts on the Monopoly board, there are basically 4 types of locations where you could buy properties in the real world, and some are much more worthwhile than others.
Discretionary locations
These are the most expensive locations in our capital cities – the “established money” locations where most of the residents have lived for a long time and where many residents have paid off their home loans years ago.
In general, these locations are the established inner-ring suburbs of our capital cities or suburbs close to water.
Think of Toorak, Brighton, or Kew in Victoria, Teneriffe or New Farm in Brisbane, and Darling Point or Bellevue Hill in Sydney.
Over the long term, this sector of the housing market outperforms the other segments, in part because of its scarcity, but in particular because, as we know, the rich are getting richer than the average Australian and they can afford to and are prepared to pay a premium to live in these prime locations.
In general, these would be considered A-grade locations but interestingly the property cycle values in these suburbs are usually more volatile.
During property booms and periods of economic growth, wealthy Australians have the financial capacity to indulge their emotional wants and buy the most expensive properties they can.
Then during the inevitable economic downturns activity in these locations tends to quieten down as is currently happening.
Of course, not everyone can afford to buy at this end of the market, so strategic investors often look to invest in one of the following locations instead.
Aspirational locations
These are the upper-middle-class areas and gentrifying locations of our big cities which would also be considered A-grade suburbs.
These include upper-middle-class suburbs like Bentleigh, and Elwood in Melbourne; Paddington, Mosman, Randwick, or Newton in Sydney, and Camp Hill or Grange in Brisbane.
These are the suburbs where many affluent millennials are aspiring to move as they enter the family formation stage of their lives.
When this wealthier demographic moves into a suburb they tend to push up property values.
As you wander through these suburbs you’ll see a changing neighbourhood with new developments and infrastructure improving the quality of services for the residents as well as driving economic and job growth.
These developments also create a ripple effect producing economic, social, and cultural change.
Affordable locations
This is where most homeowners and many investors look because that’s where they can afford to buy.
However, sometimes investors buy in these suburbs because they are “advised” to buy at the cheaper end of the market.
There is no doubt some affordable areas make good investment locations, especially those that benefit from the ripple effect from adjoining aspirational suburbs and eventually become aspirational suburbs themselves.
On the other hand, most locations at the affordable end of the property market underperform with regard to long-term capital growth and rental growth because many of the owners are young families who have stretched themselves to their financial limits and are often only a week or two weeks away from being broke.
Similarly, the tenants who rent in these locations live there because that’s all they can afford and are unlikely to be able to pay you increasing rents over time since they are also only one or two weeks away from being broke.
As an investor I would steer clear of these affordable locations – most of these will never gentrify in your lifetime and they will underperform with regard to rental growth and capital growth.
Often owning properties in these locations can end up being more trouble than they’re worth.
Last choice locations
In every city, there are suburbs where people live because they really have no choice.
No one wakes up in the morning wanting to live in these suburbs, but social circumstances force them to.
Of course, investors should steer clear of these locations.
So just like owning the right locations on the Monopoly board, owning an investment property in the right location will do 80% of the heavy lifting of your property’s returns.
A final note
Remember that the location isn’t the only thing to consider.
Sure, the location of your property does 80% of the heavy lifting of its value, but there will always be some areas more desirable than others, even in the same suburb.
Then owning the right property in that location is just as important.
A-grade properties are not necessarily located in the most expensive suburbs and don’t all come with a multimillion-dollar price tag, but there will always be a depth of buyers regardless of market conditions.
In general, when looking for a property, it’s very rare to find the “ideal” property, so buyers usually need to make some compromises.
When they stumble across an A-grade property, they rarely need to make any or many compromises as it tends to “tick all the boxes”.
On the other hand, with a B-grade property, they have to compromise on a number of factors such as living on the wrong side of the street, or maybe not having a north-facing orientation; while many compromises are made when purchasing a C-great property like living on a busy through road or having an impractical floor plan.
So be careful … don’t get stuck with an underperforming property in the wrong segment of the housing market, because if history repeats itself, and it most likely will, you could end up with a dud property that you will regret owning and have difficulty selling if you need to.
