Tread carefully in western suburbs

PORTFOLIO POINT: Despite patches of fast growth, the western suburbs of Melbourne and Sydney should be approached cautiously by investors.

It certainly made for an interesting press release! KPMG demographer Bernard Salt identified Melbourne’s west as Australia’s fastest-growing urban area, with the population jumping by 18,000 in 12 months.

These kinds of announcements invariably lead me to think that the rapid population growth is setting the scene for spurt in house prices. How different can it be from Sydney’s inner-west, one of Australia’s premier locations for property investors over the last five years?

Actually, there are real differences between the western suburbs of Melbourne’s two biggest cities, which is why it’s important that investors don’t take Salt’s report as confirmation that Melbourne’s west is primed to take off.

A growing population is only one factor behind rising house prices and although this increase may have an impact, it’s only likely to be felt in certain property types in very specific locations.

Let’s first look at what has been driving property performance in Sydney’s west.

The first thing to recognise is that not all property has benefited from the gentrification drive that started in Balmain 20 years ago. Above-market performance has pushed up the prices of period houses in the right locations, but it hasn’t helped the owners of new apartments in mixed-use developments, for instance, who have suffered years of underperformance.

So what have been the elements behind the push? I asked Rich Harvey, director of Propertybuyer in Sydney, for his insights into the growth of Sydney’s inner-west.

“For a start, I would agree that we should dispel this notion that population growth automatically leads to a corresponding and sustainable rise in property prices,” he said. “If you look at suburbs like Kellyville in the northwest, a higher population led to an increase in the supply of land and development, diluting any upward price pressure. What I see is consistently higher property price growth confined primarily to areas close to the CBD or regional transport hubs, where supply is limited and demand is consistent.

“Another telling factor, often discounted in this equation, is the cultural element. If you consider the charm of period-style houses in the inner-west and the village-type atmosphere of strips like Norton Street in Leichhardt, with its Italian influence, that’s an amenity well-paid young professionals are looking for. Add in the excellent public transport and you have your explanation why the inner-west is performing.”

But isn’t that mainly due to home buyers? I asked. “No,” Harvey said. “We see plenty of investors at open for inspections along with expats, mature couples and young professional home buyers.”

So how does this profile compare with Melbourne’s west?

Five-year growth performance in house prices identifies Footscray as one of the growth leaders in the Melbourne area, along with Maribyrnong and Essendon, technically a northwestern suburb but one where the median house price topped $1 million this year. Further west, a one-year growth rate in Sunshine, 12 kilometres west of the CBD, was a commendable 30.9% according to the Real Estate Institute of Victoria.

I asked Chris Taylor, director of Jas H Stephens, based in the inner-west suburbs of Yarraville and Williamstown, about the similarities and differences between Melbourne and Sydney’s inner west.

“We’re certainly seeing a lot of young professional buyers coming over from the southeast looking for a more affordable house in areas like Yarraville, Seddon and Williamstown,” he said. “In particular, many of the buyers I meet are upgrading from apartments and looking at period houses for the extra room and a garden. The areas that are doing best are those close to shopping and restaurant centres and transport. It’s the village-type atmospheres, like those in Yarraville and Seddon, that are most prized.”

Well this is sounding familiar, I thought, but how about the mix of buyers'” are there investors and other buyer types in the market place in Melbourne’s west as well? “There are investors in this area,” Taylor said, “but many of them are drawn to the new developments in central Footscray. They seem to be attracted by higher rental returns, which are lower in the west than the rest of Melbourne. But I think investors should really be concentrating on capital growth.”

But then we came to a substantial difference between the locations: transport bottlenecks, which Taylor nominates as a “big concern” for Melbourne buyers heading west. Unfortunately, commuting from the west to the rest of Melbourne is a significant obstacle for many home buyers.

It’s one of the major reasons why I am cautious about investing in this part of Melbourne. For investors drawn to the west, period-style houses in select precincts of suburbs such as Yarraville, Seddon, Newport and Williamstown are an attractive proposition, but not as attractive as areas with better transport options. And it’s not just transport that’s the issue; other critical components such as schools and healthcare have always lagged behind the rest of Melbourne.

While the past few years have seen some excellent performance numbers in some western suburbs, it pays to dig a little below the surface. Some of the rise in Footscray prices has been driven by new developments – a one-off outcome likely to subside as these units and houses hit the resale market over time.

It’s easy to make broad comparisons between regions of our capital cities but the reality is that there are very distinct differences between the western suburbs of Melbourne and Sydney. It’s very much a case of look before you leap when it comes to Melbourne’s west and it will take more than one population report to convince me that all has changed.

Property Q&A

• This week:
• Investing in southeast Queensland.
• Are NRAS properties good value?
• Where to invest with $400,000?
• Investing outside Newcastle.

Southeast Queensland

My son is planning on buying his first investment property. He thinks properties in the Caboolture area of southeast Queensland will be a great investment. What are your thoughts?

There are a few positives with areas like Caboolture. Over the past few years, southeast Queensland has emerged as one of the fastest-growing areas in Australia in terms of population. Many people from southern states have migrated north, drawn by the region’s subtropical climate, suburbs-meets-beach lifestyle and the promise of new job and business opportunities created by all that growth.

For much of the past decade, property prices in places like Caboolture have risen on the back of this growth. But there are a few other factors to consider before taking the plunge. First, while some of the growth in property prices is being driven by a technical housing shortage, investors should be aware of the Queensland government’s urban development plan, which will see increased development of new housing estates around the Sunshine Coast, Ipswich corridor and areas south of Brisbane and inland from the Gold Coast, like Beaudesert. This increased supply may act as a drag on property price growth in the future.

Second, you should bear in mind that much of the employment growth in these areas is centred on tourism, personal services and retail. There’s not nearly as much expansion in high-paying industries like finance and information technology, which attracts home buyers and investors with bigger budgets. Finally, a disproportionate amount of the growth in population comes from retirees, who usually are not working and have a limited income and asset base.

These factors combine to limit the potential of property price growth in areas like Caboolture and explain why they rarely match the gains achieved in high-demand, inner-urban areas. The over-reliance on tourism, for instance, can be witnessed by the sluggish sales performance of coastal properties across Queensland right now.

For the optimal outcome from property, investors should instead target areas where there is a great diversity of demand from home buyers, investors and tenants alike. I would advise your son to look at established houses or apartments in the inner suburbs of Brisbane. This area has a great diversity of home buyer and investor demand and plenty of willing tenants. Just as importantly, this demand has to compete for a limited supply of available property and the resulting equation of demand outstripping supply forces the price of property up over the long term.

NRAS properties

I need advice on NRAS (National Rent Affordability Scheme) properties. They are being promoted by the government as a solid investment.

The NRAS is a scheme whereby the state and federal governments provide incentives for investors to buy new rental housing, designed for so-called “middle Australian families”. A tax-free incentive per dwelling is paid each year over 10 years, including $6855 as a tax rebate from the federal government and $2285 cash from the state government. These amounts are indexed each year to the rental component of the CPI. New dwellings are required to be rented at a minimum discount of 20% on market rents, but in Queensland that discount must be 25% as the scheme is partnered by the Queensland Affordable Housing Consortium, designated as a charitable institution under tax office regulations. The scheme favours longer tenancy terms, of three or five years, and rents are regulated according to local market conditions.

This scheme is an attempt by governments to address Australia’s housing shortage and affordability problem. While that is commendable, this housing is not an investment I would recommend to investors seeking optimal growth and rental income. Investors should only be targeting properties that are in high demand and short supply, which helps underpin the maximum possible capital growth.

The NRAS scheme only finances the building of housing in new estates and nearly all property types in these areas underperform on capital growth. The reason is quite simple: new estates, by their very nature, will see the supply of property increase both within them and adjacent to them as other new estates are established. The result is that housing on new estates is always in abundant supply yet demand is either variable or poor as only budget-conscious first-home buyers and families choose to live there. The other problem is that new housing prices incorporate a builder’s or developer’s premium of about 20%. This means new housing is about 20% overpriced on completion and it typically takes about five to seven years for this premium to be absorbed by market growth.

At first glance, the rental subsidy may appear attractive, but I suggest you compare it with the capital growth from an investment grade property in inner Brisbane. For the right property you could expect capital growth of 7–10% pa over a 10-year period plus a 4% rental return. That’s an average capital growth alone of $40,000-plus per year compared to the NRAS $10,000 subsidy, negligible capital growth and regulated rental returns.

I suggest you stick to investment-grade, established property in proven, prime inner-urban areas.

Buying on a $400,000 budget

I have a budget of $400,000 to buy an apartment as an investment. Should I look at inner Brisbane or inner Melbourne?

I think either city will present worthwhile investment properties as long as you are selective. The only issue here is your budget. In Melbourne, while it may be possible to find an investment-grade one-bedroom apartment for $400,000, it is getting very difficult and investors will have to get quite lucky to find the right property on the market at this price. If you can extend your budget to $450,000 you should be able to find the right property. In Brisbane, you are more likely to be able to find a good property on the market with this budget as apartment prices are about 10% below Melbourne’s.

To find the right apartment for investment in either city, you should bear in mind that only investment-grade apartments – those with the right attributes for above-market capital growth – are the ones you should be looking at. You need to find a well-positioned apartment in a low-rise block of no more than 25. It’s very important to ensure your apartment is at least 40 square metres in area, preferably 45, as some banks and other lenders are not providing high enough loan to value ratios (LVRs) to investors for smaller apartments and, with very few exceptions, this may limit their future capital growth. The apartment complex should be located in a quiet residential street, close to transport, shops, schools and recreational facilities. Your apartment should also have an allocated car space and logical floor plan.

Whatever you do, avoid the temptation to buy a new apartment in one of the many high-rise towers set to spring up in either city. These properties have a history of poor capital growth and incorporate a developer’s premium of 20% in their price.

Outside Newcastle

In Windale, NSW, about 10 kilometres to the south of the Newcastle CBD, there are several housing department-style properties on 600–900 square metre blocks up for sale for $220,000–$280,000. Will they make a good investment? This area was mentioned as a hot spot recently.

While the housing blocks in this suburb are of a decent size and the entry prices are low, I would be reluctant to invest there.

First, when you are investing in a regional centre such as Newcastle, you should always aim to find a property in a suburb immediately adjacent to the CBD without being in the middle of it. Ten kilometres to the south in a regional city means this area is too far out, unlikely to see the underlying growth in land prices necessary for above market capital growth. The other factor that you mention is the presence of housing commission and ex-Housing Commission property, which is often not of a style or a construction type favoured by the majority of buyers. Typically, suburbs with lots of these properties tend to experience below-average market growth long after the Housing Commission stock has been sold to private owners.

Unfortunately, some areas like this are labelled as property “hot spots” due entirely to the low entry prices; and I would caution investors to avoid buying purely because of low prices. Low property prices are rarely an oversight; they come about for a very good reason: most buyers and tenants do not favour these properties. It’s usually a much better investment strategy to look at the right properties in higher land value areas. The price of these properties represents that the demand/supply equation is running in the investor’s favour and the property is sought after by the majority of buyers and tenant types. If you wish to invest in Newcastle, restrict your purchase to one to three kilometres from the CBD, and be sure it is a style that is well established and timeless for the area. (We have previously pointed to suburbs close to Newcastle CBD – click here).

'¢ '¢ '¢ '¢

Monique Sasson Wakelin is Media and Communications Director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors.

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.

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