Melbourne's hotspots

The headlines keep bringing promises of a resurgent property market. This week I want to focus on how the market may develop in Melbourne.

At the top of Melbourne's property tree many investors would be familiar with Toorak, Brighton and South Yarra. The stratospheric prices achieved in these districts are largely owner-occupier driven. The sheer land value of these areas led to the subsequent gentrification of adjacent inner urban areas such as Richmond and Prahran by people prepared to take a punt on less-developed precincts.

These suburbs have now joined the ranks of real estate that continues to hold its value beyond any property market’s cyclical peak. The common factor in these more recent sought-after suburbs – post 1980s – is that they now feature commercial and retail hubs that have been refurbished off the back of the population influx into dynamic mixed-use precincts. The sheer convenience of walking distance proximity to such a strip can add a premium of up to 20% on nearby properties.

Classic examples are Bridge Road, Richmond; High Street, Armadale; Brunswick Street, Fitzroy; Burke Road, Camberwell, Glenferrie Road, Hawthorn; Chapel Street, Prahran or High Street, Northcote. Offering a location that's just a stone’s throw from the CBD, public transport and leisure facilities, availability of scarce architectural styles – Victorian, Edwardian, Federation and Art Deco – and ongoing strong demand from owner-occupiers and tenants are a recipe for success.

These districts buzz with regular shopping and business traffic that gives way to the weekend retail and brunch set. Even though you may pay more for the best residential pockets, their sheer appeal will mean good future capital growth. I still consider them hotspots to get into in spite of, and even because of, their blue-chip status.

But what most investors want to know is which areas will be next to fire? The answer is areas that have or will potentially show a “village atmosphere”.

These “villages” are smaller, more community-oriented precincts that don’t have the hum of a major hub, but they do have a sense of belonging and intimacy and, in the face of an increasingly impersonal society, are emerging as tight-knit communities with common values and aspirations. They take an inner urban dweller back to a more “neighbourhood” feel with intimate and sociable meeting places and quieter nearby shopping facilities. Classic examples are around Greville Street, Prahran; McAuley Rd, Kensington; Ormond Road, Elwood and Bay Street, Port Melbourne.

Other areas that are also moving in this direction include affordable, but good quality parts of Kensington, Flemington, Brunswick, North Melbourne, Collingwood, Thornbury – as an emerging extension of High Street, Northcote – Yarraville, Balaclava and North Balwyn. In some of these areas, there will be a mix of period and contemporary architecture. But the same selection rules need to be applied as those for the tried and true blue-chip precincts: walking distance to the heart of the “village”, public transport, consistent streetscapes, architecture with scarcity value and complementary neighbouring land use.

A unique example where both the commercial/retail strip and modern day “village” co-exist is Lygon Street, Carlton. Parts of the landmark strip are noted for vibrant restaurants and shops that attract visitors from across Melbourne, while other sections have been quarantined as localised “mini-villages”. Nearby streets are both prized and pricey, but worth it in the long run.

There is a third major category that defines sectors of the Melbourne market – the sought-after school factor. Melbourne has Australia’s highest concentration of elite schools, both private and government. The majority of sought-after schools underpin values and demand for prime real estate in suburbs such as Kew, Hawthorn or North Balwyn.

The founding school fathers had the foresight to locate on public transport routes or within walking distance of family homes and in areas that offer other attractive amenities such as shopping and leisure facilities. There is still some transitional movement in these areas as older families move out and younger families are willing to pay a premium to secure property in their preferred school zone. Such properties are tightly held as families devote about nine years (or more) to their children’s education. As some of the most elite schools have outgrown their inner-urban campuses, they have set up new “satellite” campuses in suburbs such as Glen Waverley and on the Mornington Peninsula. Properties close to these prestigious school “branches” are showing consistent price growth.

For the investor, the way forward is to investigate these emerging areas with an unemotional checklist that fits the stated criteria. At worst, the tour of discovery may lead to some very good cappuccinos and, at best, the chance to strike before the iron gets too hot!

Before getting to this week's letters I just want to thank the dozens of Eureka Report subscribers who have written in support of my call last week to scrap the ban on transferring residential property into DIY super funds. I am going to campaign hard on this issue and every support is welcome. Keep those emails coming they will all be needed to get this simple and reasonable reform through the Treasurer's office.

This week I have selected the following letters from subscribers:

Which sale method?

I am currently trying to purchase an investment property and have attended several auctions and also looked at private sales. Obviously, auctions are more popular in the high-priced and most sought-after areas because vendors can aim for a better price. Do you think one sales method is better than the other from a purchaser’s point of view?

Both methods have their peculiarities and in truth neither method favours buyers any more or less than the other. If we look at auctions, so-called “dummy bidding” is illegal and now very rarely an issue for purchasers in states where it once was commonplace. The negotiation process is comparatively transparent since bidding takes place in a public setting and the price is determined by genuine buyer competition. Vendors usually have a high motivation to sell once auction day arrives and there is usually a clear-cut result achieved on the day.

Auctions are unconditional, so as a purchaser you need to have finance in place and ready to go. Some people are unnerved by the pressure of competing publicly against other buyers, and quoting ranges that may be well short of the correct market value, but this is really no worse than the pressure of negotiating privately, and trying to determine the correct value relative to an asking price or invitation to submit offers in excess of a particular figure'”they are just a different kinds of pressure.

Private sales may impose less pressure to make instant decisions, and the negotiations never take place in an open forum so you will never come face to face with any other buyer, genuine or otherwise. That means you are not privy to the genuine level of competition.

Moreover, waiting for the response to an offer can by very emotionally draining. As long as you are well prepared have done your research, and know your price limitations, both are a perfectly legitimate ways of securing a fine investment.

A buyer’s frustration

As a young, first-time investor, I’m finding that every potential property I look at starts with one price tag and ends up selling at a much higher level. I have my deposit available for something around $300,000, but am wondering whether to go above this amount and look for properties that I can put some money down on and then negotiate with the lenders for the amount I need. I’m getting tired of being pipped at the post.

I can tell you that even seasoned investors need patience and perseverance to find the right type of property for the right price. I would urge you to do your homework thoroughly and independently price-benchmark the correct value of a property against actual sale prices for similar properties rather than rely on the accuracy (or otherwise) of quoting ranges.

At the same time, apply for pre-approved finance and have this before you go searching and selecting property. It is usually most helpful to think in terms of a purchasing range rather than a single figure; for example, if you have the $300,000 figure in your mind, consider the $300 000–330 000 range and get your lender to approve the maximum you are comfortable with. NEVER go along to a purchase without clear-cut borrowing limits. Then it’s a matter of focusing solely on the locations and properties that you can afford.

The right direction

My partner and I have been looking to buy an investment property and have noticed some emphasis being placed on the actual orientation of the property. Is this more to do with “green” design issues or does orientation really affect resale values?

The orientation of a house or apartment definitely has an influence on its appeal and, to some extent, its capital and rental value. The most desirable is a north-south orientation because this maximises the natural light year-round without getting the blast of western sun in mid-summer. That said, in most instances an east-west orientation does not usually diminish a property’s overall value. In the southern states, the wrong orientation can make colder and darker winter conditions more intense. Check a property’s orientation carefully because with the correct heating and cooling options or maximum use of available natural light an east-west orientation isn’t automatically a bad thing.

A tired investment

We have had an investment property for nine years and it has done very well in terms of capital gain. It has always attracted good tenants. Now, though, it is starting to look a little bit tired and dated. Even so, we don’t think there would be any difficulty in renting it, especially on today’s tight rental market. We’ve kept up with maintenance over the years, but how do we assess what would be a sensible level of improvement now?

As a rule of thumb, it’s a good idea to keep the carpet, paint, floor boards and other fixtures and fittings fresh, cIean and neat. I assume the property was in sound structural order when you bought it, so I suggest that only light cosmetic improvements should be undertaken. If it hasn’t been repainted for some time, then look at doing so, but keep colour schemes neutral and generally appealing.

Check on the state of the flooring and assess what if anything needs replacing. Creating extra storage space, such as cupboards or built in wardrobes, can add enormously to a property’s appeal and rental and capital value. If the kitchen and bathroom are getting tired, you might consider a modest cosmetic upgrade such as replacing tiles, cupboard doors or handles or a bench top. It may be timely to consider upgrading odds and ends like this at a time when rents are strong and capital values are rising moderately.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in depth information that is specific to their situation.

Monique Wakelin is co-founder of Wakelin Property Advisory, www.wakelin.com.au, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

Do you have a property question for Monique Wakelin? Send an email to monique@eurekareport.com.au