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Investing for Capital Growth

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Are You Looking To Invest for Capital Growth?

“I am looking at investing in property, what areas are going to increase in value?”

One of our most frequently asked questions…. Where to invest for capital growth? Whether investing in a primary place of residence (PPOR) or investment property (IP) purchasing in the correct location and asset class can enhance the opportunity for capital growth.

‘Melbourne and Sydney residential property’ is more complex than meets the eye as it encapsulates a variety of sub-markets including but not limited to:

  • City apartments
  • Prestige inner city dwellings
  • Middle ring suburban homes
  • Suburban units and apartments
  • Bayside homes
  • Rural residential properties
  • New housing estates

In answering the initial question there are markets that have growth potential and equally areas that do not attribute the robust economic drivers that create sustained capital growth. The fundamental principle of value whether you are talking direct property or equities is supply vs demand – How much supply is there of a product in the marketplace and at what price is there demand to absorb the product?

As shown in the simple Supply vs Demand diagram above, the points at which the supply and demand lines intersect is known as ‘equilibrium’ ie. The pricing point at which demand equals supply. The blue supply line S gives a visual representation of the decreasing equilibrium price when increased supply is placed on the market when demand remains static.

Supply Demand

P= Price Q= Quantity S= Supply D=Demand

Bringing this back to real estate, when there is increasing supply and static demand the result can be downward pressure on market values. An example of this is city residential apartments, whereby there are a record number of planning permits issued for new apartment developments within the CBD and surrounds which will increase supply, this combined with soft/static demand is likely to place downward pressure on the value of city apartments and will likely stunt capital growth in the short to medium term due to the supply vs demand imbalance.

Another example looking at the other side of the equation is inner city dwellings. The supply of dwellings upon their own titled allotment within regarded inner suburban localities is limited given the majority of land has already been developed. Given this reason, supply is considered static for this market and as demand increases, market value increases also. This is explained in the supply vs. demand graph as the shift from D to D’ showing increased demand producing a higher equilibrium pricing point.

Not every purchaser has $1.5 million plus to spend on prestige inner suburban dwellings, but there are certainly other markets that provide strong economic factors for growth. When providing advice in relation to direct property investment it is important to understand the parameters of each client and establish mutual goals that can be achieved. Varying budgets and motivations can have a strong impact on the property class selected as well as how diversely spread the funds are allocated to reduce market risk.

As well as purchasing within strong localities it is important to factor in other elements of property that can impact cashflow and capital growth such as planning scheme changes, restrictive Covenants on title, and structural integrity of improvements.

About the Author

Peter commenced his property career in 2008 and has experience in commercial, industrial, retail and residential valuations. He has undertaken work for mortgage security, litigation purposes, bankrupt estates, taxation purposes, development feasibilities and pre-purchase / disposal.