CAPITAL GROWTH

Capital growth is closely linked to government spending. Since federation, governments irrespective of their political bias have invested heavily in capital works programs designed to improve the infrastructure and amenity of the city (CBD) which in turn has attracted private sector investment. The better the infrastructure & amenity are, the greater the demand is to live there or close by which explains why land values in some locations rise faster than in others. So, what is infrastructure? Transport, schools, hospitals, roads, shipping, airways, public housing, water, electricity & gas etc. and amenities? Parks, gardens, shopping centers, natural attractions such as rivers, bays, mountains, private schools, commercial outlets, sport’s stadiums and so on. Imagine if the government installed a genuine fast rail service between Melbourne & Geelong? Property values in Geelong would soar! Another important consideration is supply or lack of it. Scarcity, according to The Macquarie Dictionary, means “insufficient for the demand, not abundant”. There are 3 components to scarcity, the most obvious is location. Properties closer to the CBD are far more sought after and hence scarcer than properties in the outer suburbs where supply is virtually unlimited. The 2^nd component relates to improvements. Well maintained older style properties built before 1970 are in strong demand because they cannot be replaced. If that is true, then why are houses demolished? The answer is if the property is not carefully maintained & improved to meet the forever changing demographic needs of buyers, then there will come a time when it is cheaper to build a new house than renovate the existing one. The 3^rd component is density. This particularly applies to multi-unit / Hi rise developments and to a lesser extent, new housing of which there is an abundance. The greater the density is, the lower capital growth. The exception is property situated in unique or highly desirable locations. Governments play a massive role when it comes to density.

YIELDS

Given that most residential investments are for both wealth creation (growth) and cash flow through negative gearing, it is a matter of finding the right balance. Generally, properties that offer high yields are more susceptible to extended periods of vacancy and are less likely to appreciate as quickly as properties with lower yields. For example, properties to be wary of are fully furnished properties which have great yields but are often vacant for long stretches of time because the demand for furnished accommodation is limited. As a general rule, the relationship between yield and capital growth is inversely proportionate, the higher the yield the lower the growth which is a matter of risk. Identifying a property that has potential can be most rewarding and can play an important role in yield growth.  The key is the $$Outlay. It could be as simple as converting laundry into a study, installing skylights in a dark hallway, removing a non-load bearing wall to create more space or just removing old wallpaper and re-painting. It all adds value and even if you decide not to do the work it is something that you can potentially sell in the future. Whilst this check list is by no means exhaustive, it highlights what should be front of mind when buying an investment.