Why metropolitan markets are still safer bets than regional markets
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Why metropolitan markets are still safer bets than regional markets

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Why metropolitan markets are still safer bets than regional markets

September 20, 2018

A lot of investors are generally avoiding the property markets of Sydney and Melbourne as they consistently see declines in the past months, but experts believe that these capital cities are set for rebounds at some point. Should investors stay in the metro or explore regionals?

Investors took advantage of the property boom years ago by buying multiple assets across Sydney and Melbourne, creating a strong portfolio that saw extraordinary growth over a short period.

Now that both markets are going flat after years of upward movements, investors who are still looking to expand their portfolio are considering diversification in regional markets—a strategy supported by reports highlighting growth in the smaller markets outside metropolitan cities.

While this isn’t a totally negative approach on the current market, Right Property Group’s Victor Kumar believes that there could be risks in jumping onto regional markets.

For one, according to him, there are limited possibilities of oversaturation in the larger markets. On the other hand, investors can get overexposed in regional areas, which could make it harder to manage and ultimately minimise investment risks.

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“I'm not against regional areas, but I think that, at this point in the property cycle, the better money and the more liquidity are within the metropolitan areas,” the property expert highlighted.

Those who want to explore regional markets and purchase properties in areas farther from city centres should take a step back and reflect on their end goal before making an important investment decision.

Is the strategy worth the risk?

Mr Kumar said: “Look at the entities you're buying in and where you’re buying these properties in each area. In each state, to see what level of exposure there is, you have to take into account the land tax and other financial and economic factors.

“Then, it would come back to what they're trying to achieve. I'm assuming that by having the properties in Sydney and Melbourne, they've got the baseline covered. In other words, they've got the necessary properties to possibly generate the income that they want out of their portfolio.”

“Once you've sorted what you’re trying to achieve, that'll then point you in the direction of where you need to buy and what you need to buy,” he added.

Comparing markets

Despite the comparison between regional and metropolitan markets, Mr Kumar strongly suggests the diversification of assets across multiple markets. By doing so, investment risks are minimised as you are not entirely dependent on one property market alone.

However, instead of thinking ‘regional versus metropolitan’, he encouraged investors to take the time and effort to understand how each market moves through their respective cycles.

According to Mr Kumar: “Each state has a different cycle. Looking at it right now, Sydney and Melbourne are coming off a peak and Brisbane is taking off.”

After the property boom, a lot of investors have been trying to compare other markets to Sydney and Melbourne, thinking that the next hotspot must be following the same pattern towards extraordinary growth.

This mindset could be a trap, according to the property expert, as there are no identical market cycles across the property investment landscape.

Mr Kumar said: “A lot of us in, myself included, have been tainted to some degree by the phenomenal growth we've had in Sydney, so we started using the same template to judge how different areas and different states are doing. But we need to judge these locations based on their individual market trends

“If you look at Brisbane, there has never been a near-vertical performance. It's gone on cycles, but they are shallower cycles, and that's something that we need to be mindful of when we're comparing to Sydney and other markets,” he concluded.

At the end of the day, finding the right investment area comes down to thorough research and due diligence, not in simply subscribing to generic ‘Sydney standards’.

 

Tune in to the August episode of Investing Insights with Right Property Group to know more about navigating today's property market.

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