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Demand for Regional Property Continues to grow

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When it comes to property investing, the no brainer or the default markets for a lot of investors is to flock to the East coast capital cities, and why not, when huge volumes of data and a constant stream of news articles and propaganda is provided everyday about how some lucky punter made a million dollars in 6 months from buying in these markets.

On the flip side as soon as an overpriced regional market, which has been inflated by uninformed investors and short term demand driven by one off economic booms, has a price correction back to sustainable levels they are held up in the media as the canary in the coal mine and as a sign of things to come.

Anyone who actually sits back and takes an objective view of the markets and statistics that are presented will soon discover that everything is not always as it seems. There will continue to be rising and falling markets in the capital cities just as in regional towns and villages. The success of any investment is to look at the bigger picture and determine if you want to be part of that market long term.

There has been a flow of investment capital into regional markets which has been slowly gathering momentum over the past few years, as more and more investors who are thorough in their research are realising the benefits of regional property. Like any location regional markets are not the silver bullet but they are certainly part of the solution.

Lower capital values, and better quality property with stronger yields, then what are being offered in capital cities have been a couple of the main drivers attracting investors across all sectors of the regional markets.

Some notable investments made in recent times have been around food and fuel in the larger regional cities, where significant rental incomes backed by national tenants has seen these types of properties exchange hands either off market directly from developers or hotly contested at auctions.

The recent sale at auction of the Hungry Jacks restaurant sites in Bathurst and Orange which showed $2.6m (5.5% yield) and $2.4m (5.6% yield) respectively on top of the September 2015 sale of the Kelso 7-11 at $4.55million (6.7% yield), and in addition a second 7-11 in Bathurst and new a new 7-11 in Orange have sold to another investor for undisclosed amounts but similar details to the Kelso sale, highlights the demand for these type of properties.

Choosing the right mix of tenant and location is important and understanding if the passing rents are sustainable for the location is a key consideration for this style of investment. Leases geared with fixed percentage increases instead of CPI will also encourage capital growth, as values are linked to return on net incomes.

The residential market sectors are seeing some great results with a number of quiet achievers flying under the radar from regional NSW. Like all investments it’s important to understand what is driving the local economy and what stage of the property cycle the local market is at.

The larger regional cites will generally have the best prospect for steady capital growth in the long term, where some of the small towns will tend to stagnate then show double digit growth figures over a 12-18 month period. If you are looking purely for investment returns you want to be looking for towns which have low numbers of available rental stock, and small numbers of new building approvals. The low numbers of building approvals mean that there is not a lot new stock coming onto the market to compete with the existing housing stock, which keeps the pressure on the vacancy rates and in turn keeps rents higher and vacancy periods shorter.

Often residential regional markets are not as fluid as capital cities, but if you operate on buy and hold strategy, the long term rewards and regular income will be there.

Like many markets there is starting to be the presence of property spruikers who will be selling new house and land packages into regional towns and cities, to faithful investors who blindly go where they are told to, you will get burnt. Overpriced and unsustainable rental incomes are common in these style of investments. A quick test is to ring a local agent or property valuer to get independent advice about the property before you commit to the sale.

A little effort up front will prevent a teary conversation with the bank or property valuer when you finally realise you’ve over paid for a lemon, I’ve had these conversations with investors over the years, they are never pleasant, and this type of thing is generally more prevalent in capital cities and “Hotspots” as developers try to cash in on the blind investor demand.

When times get tough in any market there will always be a flight to quality, as even in a falling market people still need a place to live in and to run their business. Property selection in regional towns and cities is just important if not more so then in capital cities. Understanding the local economic drivers, the main employment base, how people pay their rent, where they work and socialise, and the right side of the tracks and flood lines is important if you want to be ahead of the game.

Currently are some regional towns showing some good capital gains coupled with solid rental returns, this is generally driven by a strengthening agricultural sector and supported in some cases by either mining and/or tourism. Select the towns with a broader economic base, which may include health, education, tourism, professional or government services, but is not overly influenced by any one sector. When researching, don’t just read the headlines, if there is negative press about a particular area or major industry, try to understand how that will impact on the local economy. The media will always focus on the negatives as it sells papers (or generates clicks, these days). The negative press is often at the expense of some really positives things happening in other parts of town, and as a result a sound investment region can get unfairly tarnished. If you can capitalise on this misinformation, you should be able to pick up some sound investment properties.

Another factor consider is what sector of the property cycle the regional market is in, and does it appear out of line with other towns or cities of similar size. Over the past 5 or so years the larger regional cities have had price increases and are now roughly showing similar median house prices within few grand of each other. But there where late bloomers and early starters, understanding that all these cities in fact compete against each other for new residents and investment means that if one town seems cheaper than the others, it maybe the time to invest as capital growth will need to occur to keep relativity in the market. It’s like the ripple effect from the Sydney Boom. Whilst the Sydney Boom is now considered over, the central coast and Newcastle are still seeing good demand and growth rates, once their run is over the surrounding towns will need to follow. The ripple is yet to hit a majority of the regional towns and cities as yet, and now the price gap between Sydney and regional areas is the biggest it has been in over a decade. Relativity will eventually restore as market forces go to work. With the result being either a slowing of Sydney property values and slight median price decrease (which we have already seen) and/or a raising of capital values in regional areas to fill the void. The mostly likely outcome will be a mixture of both, and at different times.

In my opinion the regional property investment Iron is hot and it’s time to strike. Like all investments situations, do your research, look at the broader picture, and consider you own personal goals and requirements. Happy investing.

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