Affordable property is a standout target for investors

Where will money be made in the property market from 2009? For my money, buying judiciously in the “affordable sector” – lower cost housing – is the standout opportunity.

But be careful. Affordable housing is set to perform most strongly in the immediate future because a combination of a housing shortage, higher first-home owner grants and lower interest rates, means demand will very soon pick up among first-home buyers, the backbone of the “affordable” sector.

First, let’s start with the process. Whenever you buy property, the first thing you should ask yourself is why you’re doing it. If you’re an investor, the answer (unsurprisingly enough) is to make money. But how soon do you expect a return and how much do you want to make?

If you’re taking a big risk and expecting to make big money fast, my advice to you is to put that idea in the too-risky basket. This is not the time to try your hand at Russian roulette!

In assessing your options, you need to apply the “investors’ litmus test”; whatever you buy should double in value every seven to 10 years and demonstrate consistent growth above inflation over the life of the investment.

In a very strong property market, like the one we saw in most capitals in 2007, Saturday’s papers often carry stories of local business identities or celebrities making a fortune selling a glamorous home in a glamorous location. After many years in property investment, I can tell you these stories are the exception, not the rule, and only happen at the top of the property cycle.

The affordable sector, under $500,000, offers you three realistic choices in most cities – “the old battlers”, older-style weatherboards in outer industrial suburbs; “the greenfields”, brand new development homes on the urban fringe; and the “old dames”, classically styled apartments in inner or middle-ring suburbs.

First, the old battlers. Recently I’ve seen a number of predictions made about the Melbourne suburb of Laverton, an area that fits the “old battler” tag to a tee. Nineteen kilometres southwest of the CBD along the Geelong-Westgate Freeway, Laverton is a long-established suburb whose original residents would have been employed in the nearby industrial plants or the now decommissioned RAAF base.

At first glance, Laverton seems to offer several advantages. It’s certainly one of the more affordable areas of metropolitan Melbourne, and has reasonable access to the CBD via the Westgate Freeway and the Altona train line. It also has the highest outright ownership rate of any suburb in Australia.

But dig a little deeper and these facts take on a bleaker look. Both the freeway and the train line are over-burdened during peak hours and upgrading them would be an expensive headache for the Victorian Government.

The highest outright ownership reflects an old suburb with an ageing demographic and a very low demand from younger families wanting to move in. The reason few want to move in is simple: Laverton’s proximity to heavy industrial activity.

Even worse, these industrial companies have reduced their workforce over the past two decades, meaning a corresponding fall in demand from prospective and existing employees wanting to be near their workplace.

In the long term, properties in our older industrial suburbs are likely to struggle to keep up with the median house price growth in the wider metropolitan area, and the only real hope for consistent investment growth lies in fundamental changes to the surrounding area, most notably, significant de-industrialisation and gentrification.

But that could take a decade or more; a lot of wasted time for an investor. Astute investors wait to see all of the signs of a suburb’s escalating value materialise rather than buying on the basis of an area’s future potential with no contemporary signs of imminent change.

For other investors, the second option of a new greenfield development seems more enticing. They are, after all, brand new estates, often gated communities that come with modern streetscapes and architectural styles, and usually include family-friendly parks and quaint little shopping and community centres.

Even better, these newly constructed houses offer investors significantly greater depreciation benefits for structures and fittings. Surely this is a great deal?

Well no, they aren’t great deals. Greenfield developments are usually sited where it makes the most sense for a developer to maximise profit; on the cheapest possible land on the urban fringe.

Greenfields offer more accommodation for your investment dollar, but that’s because the land they sit on is cheap and under-capitalised as the infrastructure that most people want near their home – schools, public transport, shops, recreation and cultural facilities – is far away or absent.

These estates are mainly designed for young families on a limited budget who still want a traditional family home. Families make up 45% of households, so from an investor resale perspective, major parts of the market are excluded. And as these families grow up, trade up and move out, those quaint shops and cute family parks take on an abandoned look.

Leasing a greenfield property is often problematic as the whole psychology of these estates is based on home ownership, and most renters will want to be closer to the city.

If you have to sell the investment within a year or two, you could lose upwards of 15% of the original purchase money as purchase prices are inflated above pre-existing stock to provide a profit for the developer/builder, a fatal flaw in an investment risk-management strategy.

For property investors, investing astutely is a game of measure and strategy, where the core imperative is not to get distracted. Buying low-risk properties is important because if you need to exit suddenly and sell it is crucial that there is solid underlying buyer demand exceeding supply in your investment area.

Most importantly, you should look for a consistent history of long-term growth, and in the affordable sector. The third option, of quality middle priced apartments in sought-after suburbs, will give you the best results over time. One and two-bedroom apartments in the right locations can be found in Brisbane from about $350,000, in Perth and Melbourne from $320,000, and in Sydney from $400,000.

But what are the right locations in the affordable range? Start with areas that have good public transport, shops, recreation and cultural facilities. In Sydney, think of areas like Camperdown and Erskineville in the inner west; while in Melbourne try Moonee Ponds or North Melbourne in the near north. In Brisbane, look at apartments in the increasingly fashionable New Farm; while in Perth have a look at Como in the south or Joondanna in the northern suburbs.

Sticking to the broader, middle price range of this sector, which young, aspiring professionals increasingly favour, is a great signal from an investment point of view. One of the tell-tale signs of an area on the rise is a plethora of up-and-coming cafes and restaurants, just like the now prime inner suburbs, which rocketed up in price 15 years ago as a result of shopping strips, small cottages and established apartments being gentrified.

This is where more first home buyers and investors will be buying the most property most of the time over the next few years. As a result of the demand, these areas will prove the most resilient in terms of price predictability, future growth and the ability to bounce back after a setback. Well-located properties in well-serviced, affordable areas will prove the least reactive to domestic or global economic fluctuations and also deliver growth ahead of inflation.

This combination of underlying demand and capital growth ahead of inflation means your equity grow more quickly and easily over time. And make no mistake; the more equity you control, the more financially independent you become.

This article first appeared in Eureka Report