Why established properties outperform (Ep.60)

This week, the Property Planner, Buyer and Professor turn their thoughts to established properties and why they offer superior capital growth prospects.  

In this episode David Johnston, Cate Bakos and Peter Koulizos take you through:   

  1. Established houses tend to be located close to the CBD, and generally the older the property; the closer to the CBD, (being the central location for the majority of jobs and the highest land value per square metre.)   
  1. People want to live close to where they work, but will that be the case going forward as many businesses comfortably shift to ‘working from home’ life?  
  2. Established properties are more likely to have an optimal land to asset ratio, with the majority of the value invested in the appreciating component of the asset – the land! 
  3. New estates may offer larger blocks of land than inner established areas, but that doesn’t equate to a higher land to asset ratio. In fact, the abundance, (and lack of scarcity) of land in these new estates means that they have a lower value per square metre  
  4. You don’t pay a ‘brand new premium’ for established property. Paying for a brand-new property means that you also pay for the developers profits and cost of labour. For established property, you pay only ‘market value’.  
  5. The NIMBY effect (Not in my backyard!) – Long established communities have great influence over councils, (including the implementation of heritage listing and overlays) that make it significantly more challenging to increase supply through development in the preferred pockets and streets. 
  6. Melbourne’s highly sought-after ring of suburbs located 5-20km from the CBD have seen very little growth in population in the last 30 years. This phenomenon has directly impacted property price growth in such areas.  
  7. Period homes have architectural appeal and features that Australian’s love, increasing the demand for those properties due to the irreplaceable nature of these elements.   
  8. And of course, our ‘gold nuggets’! 

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Show notes

  • Established houses tend to be close to the CBD. The older the property, the closer to the CBD. The commerce centre was established first, then as time went on and population increased, the city expanded, but the commerce centre remained the same. Properties closer to the CBD have better capital growth than further away.  
  • Being close to the CBD is popular because that’s where the jobs are, but is that going to be the case going forward into the future with more people working from home.  
  • Commercial rents will drop because there will be less demand, CBD office space will change and there will be more ‘co-working space’. These spaces will need to be close to transport hubs and the CBD is the biggest transport hub. Being close to the CBD will still be important, but perhaps not as important. 
  • The highest value land is where the oldest established property sits. Then what comes out of long-established infrastructure is deep rooted communities and institutions, Schools for example, which contributes to why people want to live there.  
  • Land to asset ratio 
  • The land is what appreciates – two properties both worth $600,000: 
  • Established property – $600,000, the dwelling is fully depreciated and 100% of the value of the property is appreciating.  
  • High rise apartment – $300,000 to the building, $100,000 to the land and $300,000 cost of labour and developer profits. Only $100,000 is appreciating.  
  • Optimal balance of land to asset ratio – 70% invested in the land component, because you do need a good quality dwelling as this will impact the kind of tenants you will get. 
  • In new estates – there is an abundance of land in fringe suburbs, the same factors are at play with medium to high density suburbs – people don’t want to have a dated home when they can buy brand new. The value of the land per square metre is low because of the abundance of land and distance from the city.  
  • Large portion of first-time buyers purchasing in this area, and these people have been affected the most during Covid. These areas are not aspirational, they are affordable. There are incentives for someone to buy brand new, which is compounding the problem.  
  • Brand new premium – You don’t pay a “brand new” premium for established property. The premium is for the build costs, labour costs and developer profits. 
  • The “brand-new” premium can vary depending on the commission basis for the sales and marketing people. The premium may have nothing to do with the value of the property. Don’t expect to sell it for more 3 years down the track.  
  • Look at apartments for their original sale value and then the subsequent value – then compare this with the performance of the capital city. Your property may have increased in value, but did it keep up with the capital city? 
  • NIMBY (not in my backyard!) – Long established communities have great influence over councils including heritage listing and overlays that make it significantly more challenging to increase supply through development in the preferred pockets and streets. It preserves the look and feel of suburbs and streets, it makes it difficult to develop new properties. What this does is limits the supply of houses in these locations.  
  • Melbourne’s highly sought-after ring of suburbs located 5-20km from the CBD have seen very little growth in population in the last 30 years. This phenomenon has directly impacted property prices in such areas. 
  • Architectural appeal – original period and character style homes, higher ceilings, timber frames, timber floors, fireplaces – all of these features Australian’s love.  
  • Apartments are selling well because they are appealing to migrants and foreign investors, where their local communities’ value brand new – cultural bias does play a part. 
  • Cost of the upkeep can put people off established property – it does hike up cost of maintenance and eat into rents.  
  • Foreign investment review board does not allow foreign investment in established property – and it is vital to the economy. We actually need people to buy these to prop up the economy. 

David Johnston- The Property Planner’s Golden nugget:  people talk about the inner, middle and outer ring of suburbs. Because of pie, the inner ring of 10km closest to the city is 314 square km, from 10km to 20 km is 1,256 square km – as you move out there is 4 times as much land. From 20km to 30km is 2,826 square km – which is 8 times as much land in the outer ring. As you move out each km it is exponential in terms of abundance of land.  

Peter Koulizos – The Property Professor’s Golden nugget: the value in real estate is in the land you want to spend more of your money into the land component, so it appreciates in value and then you can purchase a subsequent property.

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