Some say: ‘Location, location, location’ is the key to investing in the Australian investment property market. We think a little differently.
At EDA Property, we are driven by research (some say we drive people by it). And, after lots of research, we say: Location. Vendor. Building. These are the factors giving property investors a chance to achieve their wealth goals over the medium term. Getting the combination and all of these categories right, in our view, is critical to the long-term success for investors. And, our strategy is working! Our clients are seeing gains above the rest of the market in under 12 months.
Locality: where you should buy an investment property
If you could only pick one of these three categories to focus on, which should it be? We always tell investors that locality is the most important. Even if you picked the best house (and price) in the best street, if the entire suburb is going down for the next 10 years, it’s unlikely you will achieve any gains, let alone outperformance of the rest of the market.
Finding out the ‘where’: our initial locality screening
We screened over 2400 suburbs and selected under 200 that meet our initial locality criteria. This leaves a large number of opportunities in the marketplace for us to tailor investments for clients. However, it leaves over 2200 suburbs, which we don’t believe will outperform over 10 years. These sorts of numbers always remind me of the risks of “property investment without research.”
Here is how we drive our initial locality screen:
There are 5 quantitative measures we use to initially screen a suburb (we call them ‘negative filters’). If a suburb doesn’t have what we require, we simply won’t recommend it. We then apply our positive filters: the qualitative measures. These require more research and access to current information rather than just numbers.
Factors to consider when purchasing investment properties in Australia
One of the lead indicators we care about most is called family income growth (FIG). That’s the rate at which households, or the local population, are becoming wealthier. In other words, look at a suburb and then look at the people who live there and look at their wallets.
Show me the money: Purchasing investment properties involves looking at people
Over the last 30 years, those suburbs that have had a local population becoming richer (at a certain rate), are more likely to experience an increase in property values and rental demand. Some commentators discuss re-gentrification, this is one measure that accurately highlights a suburb undergoing this type of positive change.
An increase in wealth effects many aspects of the local community. As people become wealthier, they demand better quality facilities, they will produce more income for the local government to pay for improvements, and they will improve the general street aspect and aesthetic.
They’ll build better quality homes and increase the general desirability of the area. They will also bring in trade. Where there are people that can spend money, there are people willing to take it! Where the increase in wealth is too slow, the local market won’t demand an improvement in facilities, they will probably not improve the aesthetic and are unlikely to affect an increase in rates.
This generally highlights areas of low demand, with few facilities and local infrastructure, i.e. not many reasons someone would want to live there.
The exception: strong property growth with slow family income growth
There is still a peculiarity to all this. Some suburbs that have experienced strong growth (and will continue to do so in the future), go through a period of slow FIG
This can be a result of:
- High house prices;
- Stagnating future growth;
- Restrictions to development due to lack of available land; or
- Other economic or industrial changes.
This can all decrease the general desirability of an area short to medium term.
The hurdle rate that EDA Property applies is the figure that has historically indicated that a suburb will perform for the next 10 years. Some suburbs that display lower figures, may perform but it will take 15 to 20 years.
FIG can also be too high. Where the rate of growth appear too fast. it often highlights, lack of depth in the market (i.e. there may not be enough activity to provide meaningful analysis).
This measure has been a very accurate measure of growth for EDA Property, with clients experiencing strong performance both in the short term and in the longer term.