Escalating prices in Australia’s capital cities have many investors contemplating a regional purchase. But is this type of investment right for you?
What are the advantages of regional property investment?
There are numerous reasons investors turn to regional areas to invest – the primary one being affordability.
Australia’s capital cities have some of the highest property prices in the world, but venturing just a short way beyond the city limits can see prices plunge dramatically, allowing investors an affordable entry point into the marketplace.
Further, for those looking to establish a large property portfolio, regional investment affords buyers the opportunity to purchase multiple properties for the same price as a single dwelling in a capital city.
Whereas investors may be limited to purchasing a unit in a city, they can typically afford a house in a more affordable regional area. To many investors, particularly first-time investors, buying a house can feel like a better value purchase because of the emotional appeal of bricks and mortar.
Buying a house also increases the potential for future value-adding projects such as cosmetic or structural renovations.
A block of land also has the potential to be subject to future development – enhancing the return-on-investment prospect.
Cash-flow opportunities may be increased in regional investment locations since the shortfall between mortgage repayments and outgoings against income is less significant than city-based investments.
This is because the purchase price of a regional property is typically less than that of a capital city market, but – depending on the supply and demand scenario in the regional area – an investment can still attract a strong rental price relative to the cost of purchase.
This has led to the common assumption that rental yields are better in regional areas.
What are the risks of regional property investment?
Regional investment may be cheap, but it can also come with significant compromises and disadvantages in terms of its potential for significant capital returns.
When you invest in a stable regional town, the chances are capital growth will generally not be as impressive as it might be in the city markets.
This is down to reduced market competition and growth drivers such as transport infrastructure and new employment opportunities.
Sales times may be far more protracted than an inner-city market. Likewise, vacancy rates (the time between tenancies) may be longer.
Values might not go backwards, but growth may not be any more significant than the rate of inflation, meaning the main benefit will be in the form of rental income, as opposed to any equity gain or capital gains following a sale.
The exception to this rule is a regional area home to a fast-growing industry, where demand for accommodation driven by an influx of new people into an area is driving property prices and rents dramatically.
This in itself comes with significant risks. When times are good, these areas can prove to be excellent regional investment hotspots. When the market turns sour, they can also be home to devastating losses. The most recent real-life examples of this involve many mining towns in Australia.
When mining projects were in full swing and demand for Australian exports was high, regional areas near mining projects experienced incredible growth. The undersupply of accommodation, relative to the influx of new workers, was such that rents skyrocketed, as did property values.
Property construction boomed as a huge number of investors looking to capitalise on these market conditions flocked to the area. Over time, the market came to resemble a capital city market – high entry price points and high rents, with plenty of competition. The key exception was there was one industry responsible for the growth, as opposed to a diversified economy largely driven by a population with a desire to live in the area.
When the commodities downturn hit, and mining project construction began to taper off, a large number of investors were left with vacant properties going backwards in value. The transient workforce that had been the key driver to value growth and rental demand disappeared almost overnight.
Investors who had bought into the market near the middle or top of the cycle soon faced the prospect of paying a mortgage that far exceeded the current value of their investment property.
The problems associated with relying on a single economy as a driver of growth certainly isn’t restricted to mining towns, although the sheer scale of the mining industry means these locations are the most prominent example.
Areas reliant on tourism, whilst not susceptible to the highs and lows of commodity-based economies, can also suffer as a result of wider economic change. If the national economy suffers a downturn, the number of people choosing to go on holiday drops, leading to reduced demand for rental accommodation and, subsequently, reduced property values.
If you live away from your regional investment property, managing it can be more difficult than if you live within easy driving distance. The choice and quality of property managers may also be more limited than in a metropolitan area, depending on the size of the region.
How to reduce the risks of regional property investment
The key to successful regional investment lies with research. Investors need to have a thorough understanding of the key growth drivers and economic indicators in any area. Investors should target towns experiencing population growth with a mixed economic base. Diversification is key when seeking stable, long-term regional investments – so pick a town that incorporates multiple industries into its economic mix.
Investigate council documents to find out what the plans are for infrastructure upgrades in the area, and to develop an understanding of any challenges the area may be facing.
Examine vacancy rates and price growth figures and if you do decide to make an investment in the area, consult with local real estate agencies and online to find out what type of properties tenants in the area are most attracted to.
Access property data such as time on market, gross rental yields and 10-year price growth in order to establish whether there is a trend of property price growth or decline. Look at how many properties are currently listed for rent.
Look at local businesses and shopfronts – what kind of impression does the town first give? A town with empty shopfronts and abandoned buildings is unlikely to be classed as up and coming. It is crucial to target a vibrant location that looks set for key developments into the future.
Look at how close the regional area is to the major cities, and identify whether the location is set to receive a future influx of people pushed out of that capital city market. Good examples of regional hotspots going through this transition include Newcastle and Wollongong in NSW and Geelong, Ballarat and Bendigo in Victoria.
If there is a major project in the pipeline that is reliant on a single industry (such as a mining project), the key to successfully investing in the market is timing.
Investors neither want to get in too early or too late. Entering into the market without first identifying a clear pattern of price growth is too risky – any predicted growth may simply turn out to be speculative.
Getting in too late means missing out on the principle reason behind regional investment – maximising your return on a low-entry price point. The same goes for exiting the market – timing is critical to avoid huge losses. However, timing the market is a difficult feat and a high degree of risk is involved.