Australian residential property has consistently proven to be a high-performing asset class for investors. Aquila Property Investment values the hard work and sacrifices people make to be able to invest in their future. We help our clients to buy better investment properties, through independent research, assessment and buyers agent services.
We’ve covered the types of property markets and locations you should be looking for as an investor. But what about the properties themselves? Should you buy a house, a townhouse or an apartment? Which will produce better returns for you? You’ll have no doubt heard plenty of arguments in both directions; for example, ‘Houses are better because you get more land’ or ‘Apartments are better because they’re lower maintenance’.
The short answer is that any of these property types can make a good investment, and that most of the contributions to the ‘houses versus apartments’ debate are shallow and simplistic. All property types can be effective investments if you understand and apply the basics of supply and demand, and buy a property type that will be in high demand but low supply in the future.
So how do we figure this out?
Firstly, we need to understand the fundamentals of each property type. There are three main residential property types: houses, townhouses and apartments. Each have specific strengths and weaknesses. If you’re familiar with these, then skip down to the next section.
A house is considered a detached properties, which means it does not adjoin any other buildings. It sits on its own block of land, which means that as the owner you own the house and land without having to share ownership with anybody (this is known as Torrens Title). This makes houses the most flexible property type, in that you can do as you wish with the building and land without the agreement of others, as long as it conforms with council regulations. You can renovate internally and externally, and extend the building to better suit living requirements as they change. Houses are the most common property type, and have traditionally have been the most popular. The construction of houses in the future is also limited by the supply of land. This provides a level of safety and predictability in terms of both the supply and demand of houses, making them a consistently attractive option for investors.
Houses do have their downsides, however. They are bigger and have more surface area than a townhouse or apartment, making them costlier to maintain. Houses also make relatively inefficient use of land which has made them increasingly expensive over time. This means that you will generally not be able to buy a house in as good a location as a townhouse or an apartment. It also means that you are likely to receive a lower rental yield.
The size and flexibility of houses make them appealing to almost all demographic groups, and particularly to families and other larger households. Modern houses are traditionally 4 bedrooms, 2+ Bathrooms and 2 Car Spaces.
Apartments are considered to be attached properties, as they are inextricably attached to other buildings. Apartments are built adjoining each other and on top of each other on a single block of land. Because there is no single owner of this land, and access to each apartment requires common areas such as driveways, hallways and stairways, apartments come under a different title scheme known as Strata Title. Strata titled properties require a body corporate which administers common areas, insurance and also looks after the external aspects of the building to maintain consistency across the complex. An an owner, you will contribute money to the body corporate and have a say in its decisions.
The strata title aspect of apartments is considered by many investors to be the biggest drawback to owning one, as it reduces your flexibility and may lead to you being forced to pay high body corporate levies to maintain the complex and its facilities. You will also have very limited scope to modify the apartment once it is built - you can renovate it internally but you can’t change the externals or extend the building. Also, because apartments can be build on top of one another, they are not as limited by the supply of land. This can lead to rapid oversupply within an area if too many buildings commence at once.
Nonetheless, apartments are becoming more popular in Australia. Our households have become smaller over time, and as less physical space is required, apartments offer an easy, low-maintenance option. Apartments can offer common facilities, such as pools, gyms, and rooftop areas that would be unaffordable to maintain by one property owner alone. Additionally, while body corporates can be costly, a well-administered one can save time and money by professionally managing the complex and sharing costs between owners. Apartments can also offer views that are simply not achievable with a house. Finally, by using land more efficiently, apartments are cheaper to buy than a house in an equivalent location, which enables owners to either save money or choose a better location to live in.
For investors, the combination of lower maintenance costs, a higher rental yield and a superior location can make them a strong investment option. This needs to be balanced against the lack of flexibility and the risk of oversupply.
Most apartments are 1 or 2 bedrooms in size, so are most appealing to singles and couples. The accessibility and ease of maintenance makes them particularly attractive to downsizers and retirees, as well as young people.
Townhouses sit in the middle of houses and apartments, sharing characteristics of both. They are known as semi-detached properties, as they will generally adjoin another townhouse, but won’t be built on top of one another, and usually have a backyard or courtyard area of their own. Townhouses are mostly strata-titled, as they require common areas such as driveways, and generally require shared building insurance. In some cases, however, they can have torrens title. Because townhouse complexes usually require fewer common areas than apartments, the body corporate levies are often lower.
Townhouses offer a balance between the size and privacy of a detached house, and the low maintenance and efficient use of land offered by apartments. They still require land to be built on, so the supply of townhouses in a location is naturally constrained. However, a number of townhouses can be built on the same block as one house, which decreases their cost. They will usually be smaller in size than a house but bigger than an apartment, with the most possible configuration being 3 bedrooms/2 Bathrooms/1 Car. This configuration is quite flexible and can appeal to singles, couples, smaller families and downsizers/retirees, although because most townhouses have stairs, they become less appealing to the aged. Like apartments, they are difficult to substantially modify once built.
For investors, townhouses balance the advantages and disadvantages of the other two property types, including flexibility, maintenance, location and rental returns.
So now that we understand the different types of property we can buy, what’s next?
PROPERTY SUPPLY AND DEMAND - THE BIG PICTURE
The value of everything is determined by the laws of supply and demand, and properties are no exception. In a perfect market, the future supply of property would match the future demand of buyers and renters perfectly, leading to price equilibrium and consistent performance across all locations and property types.
However, the property market is from perfect. Developers of new property only have limited land available for them to build their product, and they are restricted by government as to how the land can be used. Property development also has long lead times between start and finish, sometimes many years,and cannot easily change to meet changing demand. Ultimately, this stops developers from meeting the market with the right kind of property supply. The resulting mismatch between demand and supply creates wealth for some and destroys wealth for others. We want to be on the right side of this equation.
Knowing exactly what people will want in the future is not a simple task, and if we all knew perfectly what the future would bring, we’d all be rich! There are, however, some key trends which we can take note of:
People are living longer and having less children. This means more time as a percentage of people’s lives are spent without children in their homes, which is making more compact properties in better locations more popular.
People are getting wealthier, and their property expectations are higher. Regardless of our stage of life, we are expecting bigger, more luxurious properties with better design and more features.
Smaller households mean that the number of bedrooms are becoming less important in a property. Instead, property buyers and renters are prioritizing other parts of the property - kitchens, bathrooms, living areas, and outdoor entertainment areas. There is also a growing expectation for extras such as pools that would have been considered a luxury item previously.
How will these trends flowing through into future housing decisions? Here I’m indebted to the work of Michael Matusik - one of the best analysts of this topic in Australia. He breaks down properties into three different types. Firstly there are traditional detached homes on a standard block of land. Secondly, we have mid-high rise apartments - built in large complexes and usually at least 5 storeys in height. Finally, we have the so-called ‘missing middle’. These properties usually live in the inner and middle-ring suburbs of our major cities, and consist of small-lot homes, duplexes, townhouses and boutique apartments. From here, his team has forecasted how demographic changes will shape the demand for new properties over the next decade. The graph below shows the results:
The results, based off the trends discussed above, are pretty clear. We will increasingly favour properties that offer a balance between location, flexibility, space, design, and of course, price. This will be best met by the ‘missing middle’ - well-located smaller homes, duplexes, townhouses and apartments in smaller complexes. There will still be a market for high density apartments in the inner city and new homes built in the outer suburbs, but this will not be what the majority of buyers or renters want.
So how what is the market building to meet this demand? This is where the problems start arising, and for investors, where the opportunities and dangers really open up. Firstly, Matusik provides us with a summary of what has been constructed in the Australian property market over the last five years:
As you can see, supply is not meeting demand. If you want the simplest answer for the apartment oversupply and price falls in Australia’s capital cities, here it is. Too many smaller, mid to high-rise, investor-focused apartments have been built and the market is not prepared to absorb them. The supply of new detached houses has been closer to demand, but almost all of this is being built on the outskirts of our cities, away from employment centres and services. The lack of housing supply in the inner and middle-rings of our cities has led to soaring house prices well above wage growth, particularly in Sydney and Melbourne, where demand has been strongest and land at its most scarce.
If we look to the future, this mismatch is unlikely to be solved. Unlike future demand, future supply is managed by governments and is easier to predict. The picture here is also stark. If we look at Brisbane, for example, almost all of the land supply for new detached housing is outside of a twenty kilometre radius of the CBD. Of the 240,000 detached houses planned to be built in Brisbane over the next 25 years, 95% are in the outer suburbs.
The situation with townhouses and apartments - the property types which make up most of the ‘missing middle’ - is similar. The Brisbane metro area is expecting to see 140,000 new units (townhouses and apartments) built in the next 25 years. While we don’t know the exact nature of what these units will be, the suburb breakdown is a give-away: 70,000 of these units will be built in only eight suburbs. These will almost all be mid-high rise apartments - they simply can’t be accommodated otherwise. Instead of spreading the supply of units across the city, where a mixture of types could be built, they’ll be concentrated into high-density areas, leading to continued oversupply in these locations but shortages of the right property types elsewhere.
Too much of our future housing supply will be medium to high-density apartments and houses in the outer suburbs.
This is a problem created by physical land supply and compounded by government planning and restrictions. Land supply is at a premium in our major cities as the population grows and infrastructure struggles to keep up. Moreover, the zoning laws put in place by government restricts how the land in our cities can be used, and in many cases prevents outright the construction of the properties demanded by buyers and renters. It is making it increasingly costly for developers to construct the types of property wanted by buyers, and this is compounded by government taxes and fees such as GST, stamp duty and infrastructure charges, which can add 20% or more to the cost of a new property.
The result? Developers are forced to continually increase density to make a profit. Detached house block sizes in the outer suburbs are relentlessly diminishing, while remaining unsustainably large in established areas. Townhouse complexes are moving further out of the city and are growing in size, and the builds are becoming narrower, with two adjoining walls instead of one, reducing space and natural light. Meanwhile, apartment complexes are turning into large, soulless high-rises which crush their owners with high maintenance costs and body corporate levies as they age.
What Type of Property Should I Buy Then?
This is a fairly grim picture of Australia’s future housing supply. It does, however, create opportunities for the strategic investor. We know that certain types of properties, such as high-rise apartments and detached houses in the outer suburbs, are likely to be oversupplied. Other property types, such as strategically located detached houses, duplexes, and townhouses and apartments in small complexes, are likely to be in high demand but short supply. These are the properties I would invest in.
What Should I Look For In One Of These Properties?
After choosing the right type of property, there are a number of key considerations we need to keep in mind when assessing the property itself. Other than the location itself, the are many different variables, including:
Build Type and Quality
How important each of these variables are will depend on the investment strategy you’ve chosen. For example, if you’re buying a property to land-bank, the building will be relatively unimportant, but the land itself will be very important. If you’re buying a new apartment, on the other hand, then the build quality, design and configuration will be very important, while the value of the land is unlikely to be relevant for a number of decades.
Nonetheless, there are a number of considerations for each property type that are consistent across different properties, and if achieved, will help to future proof your investment. They are built on the critical supply and demand trends that we’ve already analysed, and I’ve discussed some of the key ones for each property type in detail below:
Land Size - For a simple buy and hold (i.e not a development or subdivision), you don’t need a massive block size, but extra space on the block is becoming an increasing differentiator. Many new blocks have very small backyards, so an extra 100 sqm here can feel enormous. Side access and room for a pool, shed or even a granny flat will give your block more appeal to future buyers and gives you the opportunity to value add yourself and create extra rental income.
Configuration - A 3-4 Bedroom, 2 Bathroom, 2 Living Area, 2 Car configuration is the best way to ensure your house remains in demand from buyers and tenants. Parents want a separate bathroom from their children, and also would prefer separate living areas from them as well. If you don’t have this configuration, make sure you can achieve it with a renovation if you’re planning on holding the property long-term.
Internal/External Space - Many new developments will squash you so good internal space will be a competitive advantage for your property. You want your main living area to be at least 6 meters in length or width to accommodate a dining area and a larger couch. A large kitchen is also critical for a bigger family. At least 3 Bedrooms should be 3 x 3 and the master should be bigger still. A covered outdoor area for entertaining is very important.
Design - Good flow between the kitchen, dining/living area and the outdoor area is a high priority. Bedrooms should be entered through corridors and not off the main living area to enhance privacy and reduce noise. Good natural light into the kitchen and main living area will completely change the feel of a home.
When it comes to property investment, the market you choose to buy in is one of the most important decisions you’ll make. In the last five years, we have seen markets in Sydney and Melbourne increase by 60 per cent or more, while in mining towns across Australia we have seen property prices fall by the same amount. The difference in returns here can mean a life of financial freedom or one of financial ruin, so it’s critical to get this right.
At Aquila Property Investment, we analyse five key areas to assess a property market’s likely return, and how volatile those returns will be. But first, how do we define a property market?
WHAT IS A PROPERTY MARKET?
I define a property market here as encompassing an entire city or town that is largely independent of other major markets in the country. Within this market there will be numerous sub-markets. A capital city or a major regional centre is considered its own market, while council areas within that city would be considered a sub-market.
In the case of South-East Queensland where we operate, Greater Brisbane is a market, while Logan is a submarket. The Gold Coast, the Sunshine Coast and Toowoomba are independent markets, as they are independent cities outside of (reasonable) commuting distances from Brisbane.
So what do we look for in a property market?
STRONG FUTURE POPULATION GROWTH
This puts pressure on the supply of land and forces the construction of new housing supply. There is an important difference in the projections of population growth in a market compared to a sub-market. In a market, high predicted population growth is a sign of demand - usually net interstate and overseas migration and natural increase. High population growth in a sub-market, however, is a sign of supply - locations within a city that have high projected population growth are the areas that new supply is planned (see our The Truth About Population Growth article for more detail).
In Australia, we are seeing a pronounced trend in population growth towards capital cities, major regional centres linked to capital cites, and lifestyle locations such as coastal towns. Population growth in these areas will put further pressure on the supply of land, and force new construction.
Australia’s capital cities and regional centres linked to them are forecast to grow strongly in population and jobs in the future, driving property construction and putting pressure on scarce land.
STRONG FUTURE JOBS GROWTH
This ties in with strong population growth, and, means a healthy economy, rising incomes and less risk of a sustained downturn. The more diverse the range of employers within a market, the safer it will be - markets reliant on one or two industries have a high risk of busts. Capital cities and major centres will generally have a wide variety of employers, as well as public sector jobs, which will put a floor under house prices even during lean times.
Larger cities have shorter property cycles and are less volatile. They have more diverse demand drivers and can be less easily oversupplied. This brings steadier returns and reduces your risk.
What’s a large city? Well, Melbourne, Sydney, Brisbane, Perth and Adelaide are all over one million people, and of these cities, only Melbourne has had a period of five years or more where median house prices have not increased (1989-1996). Other major centres include the Gold Coast-Tweed Heads (663,000), Newcastle-Maitland (481,000), and Canberra-Queanbeyan (447,000). Hobart, while significantly smaller (208,000) is also a state capital which lends it greater critical mass in terms of jobs and services than an non-capital city of the same size.
Easy connections to other cities improve a city's economy, increases its attractiveness to future residents and stabilizes its property market. You’re more likely to move to or remain in a city where other cities are accessible, and the more a city is connected to other cities, the less volatile its jobs and property markets are.
A city where you can easily commute by road or public transport to another city will be better connected than one where you can’t. A city with a major airport with many direct flights will be better connected than one that doesn’t. Compare the Gold Coast to Hobart. Even though Hobart is a capital city, the only major city that you can drive to is Launceston, while on the Gold Coast you can drive to Brisbane in 1 hour (2.3 million people) and the Sunshine Coast in 2 hours (325,000). The Gold Coast airport moves over 2 and half times as many people as Hobart and offers many international routes into NZ and Asia. If you compare the Gold Coast to Townsville then the difference is even more stark - the nearest major centre to Townsville is Cairns (4 hour drive) and most flights out of Townsville are to Brisbane.
As a result, the Gold Coast housing market has followed Brisbane closely, with short property cycles (for detached houses anyway). Townsville, on the other hand has had a nine year slump from 2010-2019.
Strong connections to other cities and property markets have helped non-capital cities like the Gold Coast to achieve more consistent returns for the right kinds of property
Property markets follow a distinct cycle of peaks and troughs. Buying at a lower point in the cycle reduce risk and gives you greater opportunities for capital gain. There is not one single property cycle for a market however: it can also be broken down into sub-markets and property types.
For example, if you purchased in Sydney two years, ago, you were buying at the peak of the cycle, when supply was scarce and demand was high. Since then, falling confidence and increasing supply have caused a fall of 10%, with more falls likely. If you’d bought eight years ago, at the bottom of the cycle, you’d have enjoyed 70% capital growth, even when factoring in the recent downturn. While timing is not everything (you need to consider the other factors above), it can make a big difference.
BRINGING IT ALL TOGETHER
There are no certain rules that will guarantee success in property investment. However, by applying the rules above to your market selection, you give yourself a strong chance of long-term investment return and a much lower risk of failure. Let’s revisit our examples from the start - Sydney and Melbourne or mining towns. Faced with a choice 5 years ago in which to invest in, if you assessed the markets by future population growth, jobs growth, critical mass, connectivity and timing, you would have hands down gone with Sydney or Melbourne, as they were very solid across all five of these areas. The mining towns were poor in the last three and ended up having population and job losses as well.
It doesn’t mean that you can’t make money out of locations that don’t offer these five elements - of course you can. But the average long-term investor will only purchase a few properties in his/her lifetime, and won’t buy any more if one of them proves to be a disaster. In our view, maximizing your chances of consistent returns, and minimizing the risk of a setback that destroys your financial position, is much more important than chasing investments with a potentially higher growth rate.
“Land appreciates, buildings depreciate”, is the maxim you’ll hear in property investment frequently. Land goes up in value but buildings go down in value.
You may also have heard that only buildings can be depreciated, which means you’re better off getting as much improved value as possible to reduce your tax. You’ll also have heard that the cost of construction is increasing, which increases the value of buildings over time.
So what’s the real story?
If we look at the example of Brisbane from 1991-2011, we can see how much both land and buildings have increased in value per annum:
Based on these figures, if we invested $100,000 each in land and in buildings twenty years ago, what would each asset be worth today?
It’s clear that land is the stronger performer of the two. In fact, these figures should be even more heavily skewed towards land. After all, while the cost of construction has increased 4.29% per year, the quality of construction has improved as well. A house built 30 years ago won’t be as nice as a house built today.
This should not surprise us. It’s land in the right locations that is the scarce commodity, not buildings. There is no shortage of materials and labour to construct buildings, nor is there a shortage of places to build them. There is, however, an ongoing shortage of land with the best access to jobs, transport, schools, lifestyle and amenity. This is what drives capital growth.
WHAT ABOUT DEPRECIATION?
Depreciation is a handy way to boost your cashflow. But it’s not going to make you rich. If we use the same example as before, and depreciate the entire $100,000 invested in buildings at the highest marginal tax rate (49%), it doesn’t change the outcome much.
Depreciation is a useful tool for the investor, but it shouldn’t be the reason you invest. It’s not free money either - in the event of a sale, the amount depreciated reduces your cost base, increasing your capital gains tax.
BUT I CAN’T JUST BUY LAND, CAN I?
This is true. While you can buy a vacant block of land and hold it, most people can’t afford to do this, because it means foregoing a rental income. The loss of a rental return would also make the the long-term return of the property much lower, regardless of how strong the capital appreciation of the land was.
You can, however, buy properties with a higher percentage of land value, and a lower percentage of improved value. All things being equal, if you maximise your percentage of land value in your property purchase, you give yourself the strongest chance of capital appreciation. The key here is getting the balance right between long-term capital appreciation and short-term cashflow. To learn more how to find this balance, check out our Buy and Hold Strategies article.
There are a number of ways to value a property. The first and most obvious is market value; this is what most people talk about when they refer to value. Market value, very simply defined, is the price an informed buyer is willing to pay and an informed seller is willing to accept at any given time, where neither party is forced into the deal.
If houses were bought and sold thousands of times a day like shares on a stock exchange, this value would fluctuate dramatically. Because they’re not, however, we don’t see this variability, but it does exist. Market value can change quickly due to changes in the availability of credit, government policy changes and most of all, changes in market confidence. We can see this if we look at recent history. In Sydney, for example the price of housing has fallen 9.5% in the last year, despite there being very little change in the nature of housing there. We’ve also seen a nationwide lending crackdown, which in the past 6 months has substantially reduced the number of potential buyers and the amount they can borrow, which has reduced demand and led to falling prices. But unless this is the new normal, then credit will loosen and market values will rebound.
The upshot is this: I can accurately assess a property’s market value now, but this is only useful now, not into the future. If in a year’s time the market value has reduced by 10%, it doesn’t matter if I assessed it correctly to begin with - I’ve still lost 10% of the value of my asset.
So we need to find a way to value property that is more useful as a long-term property investor. This is where intrinsic value comes into play.
WHAT IS INTRINSIC VALUE?
In simple terms, the intrinsic value of a property is its replacement cost. Intrinsic value can be estimated by determining the cost of building an equivalent structure on an equivalent block of land. Unlike shares, houses and blocks of land are not identical, but you can generally find ones that are sufficiently similar to allow for comparison, particularly at the lower end of the market.
The Intrinsic value of a house will look something like this:
Land Value: $200,000
Improved Value: $200,000
Total Value: $400,000
The same can be done for apartments and townhouses, by dividing the total land value of the complex, by the entitlement of that particular townhouse or apartment (i.e 1 of 10 in a complex of 10).
HOW DO YOU DETERMINE A PROPERTY’S INTRINSIC VALUE?
You can most easily work out intrinsic value by determining what a similar vacant block of land has sold for, and what it would cost to construct improvements of similar size and spec. At Aquila Property Investment, we use Queensland land valuations to determine land value, and our unique value calculator to determine the value of improvements, based on their size, quality and age.
You’re never going to be perfectly accurate in working out a property’s intrinsic value. There are factors in the cost of replacement in particular that are difficult to measure, such as the value of good design, or in the case of townhouses or apartments, the cost of getting a project approved (which will be divided across all of the units). Nonetheless, it should give you a good baseline of what a similar property would cost to construct.
HOW CAN WE USE INTRINSIC VALUE
The main use for intrinsic value is to compare it against market value, to see if we are achieving good value or not. Intrinsic value’s primary strength is that it is far less subjective than market value. Market value can rise or fall rapidly based on how people feel about the property market. Intrinsic value relies on harder numbers: the value of vacant land and the cost of construction. This is helped by the fact we use land valuations, which are only conducted every 1-2 years - this gives the land value we use greater stability than the market value.
Intrinsic value’s greater objectivity gives us a useful anchor to test market value against. If, for example, the market value of a new house is $500,000, but if equivalent blocks were selling for $200,000 and I could build an equivalent house for $250,000, then the market value for this new house is too high. Even if I don’t build that house myself, someone else likely will and this will reduce the market value of the first property.
Let’s say we decide to build this new property for $450,000. This is the property’s intrinsic value, because that’s what it costs to produce, so paying $450,000 to do so is neither good or bad value. But how does it compare to similar established properties in the area? Let’s say we find an equivalent property that is 5 years of age, and we calculate that its intrinsic value is $400,000, based on the fact that the improvements are less valuable because of age. If the market price is $425,000, then building the house for $450,000 is good value compared to this. But if the market price is $350,000, then we would be foolish to build - as our new house is likely to be worth less in market value after it has been constructed. The established property, however, represents great value - as the market price is $50,000 below its intrinsic value.
This is the same process for units, if a little more complicated. We see a new unit that we want to buy, in a complex of 100 units. It’s for sale for $600,000. We work out the intrinsic value - the cost of land was $10,000,000 (or $100,000 per unit) and the cost of construction for that unit based on its size and spec is $300,000. If we allow for marketing costs and a fair 20% profit for the developer, then the intrinsic value of the unit is $500,000 - $100,000 short of the market value, and a difference that would take many years to recoup. The fact is, another developer can buy another equivalent site for $10,000,000, and build another 100 apartments for $300,000 per apartment, sell them at $500,000 and still make a profit of 20%. The next developer will also try and achieve the higher market value of $600,000 if they can, but while there are still profits to be made at a lower sales price, developers will keep piling in and building until an acceptable profit margin is no longer there.
The intrinsic value of new high-rise apartments tends to be much lower than the market price, due to the high profit margins involved. This is likely to seriously impact your growth in the short-term.
Understanding a property’s intrinsic value can help us avoid major mistakes, and gives us the opportunity to profit from mismatches between market value and intrinsic value. It is not, however, a long-term predictive tool. If we want to maximise our future profits, we’ll first need to select the right kinds of property in the right locations.
A Buy and Hold Strategy is fairly simple. You as the investor purchase a property and hold it for the long-term - you don’t sell it based on short-term indicators or market fluctuations. You collect income from rent, which provides you with the cash-flow needed to hold the asset.
WHY BUY AND HOLD?
For most property investors, a buy and hold strategy is the simplest and has the lowest risk. Unlike more aggressive strategies such as property development or ‘flipping’, buying a property and holding it long-term is a relatively passive strategy, which can be undertaken by almost anyone, regardless of expertise and time commitments. You don’t need to be a builder or carpenter (or need to employ them) to conduct renovations, nor do you need to understand town planning and project management to develop new properties.
Nor is the strategy as sensitive to timing. If you get the market wrong for a new development or ‘flip’, you can be up for big losses, as you can also be if you bought a property for the purposes of short-term speculation. With a buy and hold strategy, as long as you are receiving rental income, and have a sensible financial buffer in place, you can hold the property indefinitely, weathering any short-term price falls.
This point is arguably the most important quality of a buy and hold strategy - it removes the emotions from your decision-making. Emotions, as the legendary investor Jack Bogle says, ‘will defeat you totally’. Holding the right property for the right length of time will reward you if you play the long game, and avoid getting sucked into what the market is doing on a day-to-day basis.
BUY AND HOLD PROPERTY INVESTMENT STRATEGIES
If buying the right property and holding it for the long-term is the key to success, then these are the two areas a successful buy and hold strategy must focus on. Buying a property with great investment fundamentals will give you the confidence you need to hold it for the long-term, knowing that you’ll eventually be rewarded. And buying a property that you can afford to keep for the long-term will allow you to hold it, regardless of what the market does.
The strategies below are about finding that balance - between great long-term investment fundamentals and short-term cash-flow requirements - which is the true art of successful investment. These are the strategies we use for clients at Aquila Property Investment. They are broad strategies based on intrinsic value, building design and age and cash-flow requirements and I haven’t gone into detail on which types of locations and properties to target. However, all of our strategies rest on three pillars:
As the name suggests, the Balanced strategy aims for a balance between capital growth and cash-flow. Capital growth is underpinned through strong location selection, and ensuring you achieve a minimum level of land value (not buying in a high rise or large townhouse complex is a good start). Rental returns are strongest in this strategy as a result of modern improvements, with a focus on tenant appeal. Getting the extra rental return is critical. If you’re buying a newer build with lower land value and still getting a low rental yield, this negates the whole purpose of this strategy! Depreciation is increased and maintenance is reduced by purchasing a newer build, which will produce better cash-flow from the property and allow for an easier hold.
Land Value: 20-40%
Improved Value: 60-80%
Up to 20 years
Gross Rental Yield
Balanced Property Investment Strategy in Action - Townhouse purchased in southern Brisbane in late 2018 for $293,500
The Growth strategy aims for high levels of capital growth through location quality and land value. This is augmented with a building that has an attractive long-term design and configuration, which can be improved through partial renovation/upgrades in the future. There is likely to be a reduction in rental return compared to the balanced strategy, due to the higher percentage of land value and less modern build. The yield can be improved in time by upgrading the property and making it more attractive to tenants - ideally using equity gained in the property during the first 5-10 years of the investment.
Land Value: 40-65%
Improved Value: 25-50%
Gross Rental Yield
Growth Property Investment Strategy in action - House purchased on the southern Gold Coast in late 2018 for $600,000,
The Land Bank strategy is designed to achieve the highest possible capital appreciation within your budget, by maximizing the value and quality of the land in your investment property purchase. This does come at the cost of short-medium cash-flow, which means the strategy has a higher level of risk.
The basis of this strategy lies in the superior performance of land over buildings in recent history. For example, in South-East Queensland, land has appreciated on average at over twice the rate of buildings. To maximise the growth in land value, we must select land that can achieve a high value of future construction, as this will be the main driver of accelerated capital appreciation. Depending on the area, this future construction can take the form of houses, townhouses, low-rise apartments or medium-high rise apartments. Depending on the property type you select, you may have the ability to build these future improvements yourself, or you may sell the land to a developer (at a premium) to do so.
The property itself will be older and getting towards the end of its functional life, which will limit rental return and future rental growth. Rental yield (and location quality) can be improved by choosing a townhouse or unit over a house, however, you won’t have the flexibility to develop the land yourself in the future.
Land Value: 65%+
Improved Value: <35%
25 years +
Gross Rental Yield
Land Bank Property Investment Strategy in action - Apartment purchased in early 2018 for $357,000,
Location is arguably the most important factor when considering the likely future return on a property. Yet much of what passes for analysis in this space is at best skin-deep, and at worst completely counter-productive. You’ll regularly see articles which talk about the top performing suburbs for the last twelve months, which as a predictive tool is about as useful as reading 3 pages of a book and guessing the ending from it. I also often hear about locations that are recommended because of one new piece of infrastructure, like a railway line, or because they are slated to have strong population growth. New infrastructure is useful, but is only one piece of the puzzle, and has often already been priced into the market. Future population growth within a suburb, on the other hand, is actually a major negative - yet it is constantly sold as benefit.
If we’re going to understand a location, we need to take a more holistic view. At Aquila Property Investment, we assess locations as part of our client’s investment strategy across 7 major criteria. This enables us to rank suburbs and make considered predictions about future growth. The 7 criteria - and how we measure them - are below:
While there are a lot of locations in Australia we’d like to live, there are only certain locations that will provide us with the means of doing so through a high-paying job. Locations with access to lots of high-paying jobs are likely to achieve stronger growth in the future, and suffer from less volatility, as there will be constant demand for property in these areas from higher income-earning buyers and tenants.
How do we measure it?
High median family incomes, solid historical income growth and low unemployment all help to signify that a location has good access to employment opportunities.
Accessibility to employment centres and other key services easily by car and public transport options are critical to a location’s appeal to buyers and tenants. We need to look beyond one piece of infrastructure here and take the whole transport picture into account.
How do we measure it?
We measure the distance of the location to the nearest CBD and assess the number and quality of transport options, including car, bus, train, tram and ferry.
A high quality of local schooling, health and lifestyle service such cafes, restaurants and gyms significantly enhance a location’s value. The more walkable these services are, the better.
How do we measure it?
Microburbs gives us a schooling, lifestyle and convenience score, and Walk Score ranks how walkable a suburb is.
Amenity is a hard to define but increasingly important quality - it’s one of those ‘you’ll know it when you see it’ criteria. It’s really about how pleasant a suburb is to live in. Suburbs with few main through-roads, low levels of density and construction, plenty of green space and access to water will score highly on amenity.
How do we measure it?
We assess the tranquility score of the suburb, zoning laws, owner-occupier ratios and crime rates. We’ll also take in account unique factors such as access to the beach, rivers, or national parks, or negative aspects such as being under the flight path.
Locations such as Coolangatta on the Gold Coast possess incredible natural amenity, although this is offset somewhat by higher density construction and a higher crime rate than the QLD average.
This is very important. While past performance is not always a guide to future performance, in property, consistent, long-term performance in a location has proven to be a reliable indicator of future growth. It doesn’t mean the numbers themselves will be repeated, but the factors that create value within a location don’t change overnight.
How do we measure it?
We measure the capital growth per annum houses and units in the suburb, over the last 25 years (not 1 year!).
Locations with limited future land supply, projected population growth below the market average, and no large increases in any one stock type will have constrained future supply of housing, which means less competition for your investment.
How do we measure it?
We assess the amount of available land within a suburb, and use the projected population growth figures for the next 25 years.
Locations with high projected population growth are the areas that will see the most new supply, and all things being equal should be avoided.
This is an important metric which helps identify the likely capital and rental growth of a location within the short-term.
How do we measure it?
There are numerous statistics you can use to determine the state of the current market, including stock on market, days on market, vendor discounting, rental yield and vacancy rate. We use a Demand to Supply Ratio score which helpfully aggregates 8 such measures into a single score - this is handy (although not foolproof) in assessing what the market is likely to do in the next 1-2 years. We also look at rental yields and vacancy rates to determine the health of the rental market, and break this down to specific property types to get a more accurate measure.
These statistics are, however, highly overrated as a way of predicting long-term growth. Short-term market measures do not provide a reliable gauge of a suburb’s performance long-term; for example if you followed the DSR Score, rental yields and vacancy rates you’d have bought in mining towns just before their peak, and lost a lot of money as a result. That’s why we assess 6 other criteria to make our judgment!
Population growth is often cited as a major driver of property price growth. While it is an important factor, you need to have a full understanding of its effects before you can use it as a guide to decision making.
Population growth is measured at a number of different levels. The first is the city level (i.e. Greater Brisbane, The Gold Coast etc.). Below this we have the local government areas within the city (for Brisbane this includes Brisbane, Logan, Ipswich, Redland and Moreton Bay, while the Gold Coast and Sunshine Coast are considered separate entities and have a single council). Finally we have the suburb level. The results at city level mean very different things to the results at the lower levels.
For example, the Gold Coast has a projected population growth rate per annum of 2.1% until 2041. If this plays out, this is very positive for the Gold Coast’s property market, as it will mean, strong demand and occupancy for existing property, and the ongoing need for new supply to accommodate the growth. Because this growth is anticipated and new supply has been planned, it’s very unlikely that there simply won’t be enough property on the Gold Coast to house the new population. But the growth will place greater demand on the most attractive areas and property types on the Gold Coast, and ensure new supply is occupied. If population growth is stronger than anticipated, then it will create even more demand pressure on property, and force the construction of new supply to accelerate. If it is weaker than expected, demand will reduce. New supply will likely reduce as developers see less profit in development, and some of the new supply and established properties will lie vacant until growth eventually fills them.
So at the city level, high projected population growth is a positive, particularly for the most popular areas and property types.
city-wide population growth
Strong, consistent population growth across the city will lead to demand increasing across the city and force the construction of new supply to accommodate the growth. While population growth will lead to occupancy across the entire city, net demand and price growth will be strongest in established areas with the greatest amenity and with limited new supply.
It’s a different story at the lower level. Strong projected population growth in a locality or suburb within a city means one thing - lots of new supply. The only way a suburb can accomodate major population growth is by the construction of new properties within it. Think about it - people don’t arrive in a new suburb and camp out until a property becomes available, the growth can only occur if new properties are added to the suburb. On the flip side, if no new properties are planned to be built in a suburb over the next 25 years, then unless more people move into the same properties, population growth will be zero.
Therefore, the areas within a city that have high projected population growth are the areas that the government is planning for supply to increase the fastest. As a property investor looking at where to invest, these areas will have the greatest competition against you in terms of new properties. All things being equal, these are the worst locations to invest.
suburb population growth
It’s important to understand this when you’re being presented information about a suburb or local government area. Locations that are touted as ‘high-growth’ areas are usually done so on the basis of future population growth - but in most cases this means the opposite in terms of future capital growth.
So beware the spruik. It’s no surprise that the areas that have the highest future population growth are those most loudly marketed by property investment companies selling new properties. It’s because this is where all of the stock they have to sell is located!
Population growth won’t occur in a suburb until new supply is constructed. In many suburbs with large amount of new construction, population growth will not be sufficient to fill all properties, meaning net demand is actually negative.
Microburbs help you understand more about your prospective property. It provides a comprehensive report on factors such as the safety, family appropriate, lifestyle, convenience, internet availability and the hipness of your suburb. The data provided in the microburbs help you find the right property that suits your lifestyle.
If you want to live a quiet life, pick a property that has the highest tranquillity score. If you are socially active, choose a place with higher lifestyle score. Proximity and performance of nearby schools are mentioned in the family score. A suburb with high community scores lets you reside in a community with close social ties.
From an investment perspective, Microburbs give us lots of useful data. It ranks an area on the quality of schools, access to shops, cafes, restaurants, parks, and transport options. It also assesses an areas demographics including age, income and owner-occupiers versus tenants. It’s another helpful tool for us to compare properties against each.
Here is a list of top 10 suburbs in Brisbane and Gold Coast with the highest Microburbs score.
Walk Score lets you measure the walkability of your chosen property or any address. It analyses different walking routes available to nearby amenities. A higher walk score means that the property is accessible within a 5-minute walk from amenities. The farther amenities are from the property, the less walk score it will have. If the property has zero walk score, it simply means that it is not very accessible and may require a car to do errands.
Walk Score also describes how easy it is to walk in the neighbourhood. It tells you if there are footpaths available, if there is heavy traffic and if it is safe to walk alone.
This is a very useful tool when assessing certain types of investment properties, particularly for townhouses and units. Buyers and tenants expect that one trade off for a smaller property is a higher level of convenience. Units in particular should have a high walk score - if not then you should be wary!
Stamp duty is a tax that is levied on many transactions, including the transfer of land ownership. Although the Australian Federal government do not levy stamp duty, each individual state does, and there are stamp duty concessions for certain people. The origins of this levy go back to the early 17th century in Europe and it was originally put in place to cover the administrative expenses that a change of land title ownership entails, which is still relevant today.
Essential Component Of The Land Purchase
Simply put, in the absence of the genuine stamp, the title office will refuse to change the ownership of a plot of land. This stamp can either be issued by the local government or by an approved stamp duty assessor, who would likely be an established legal firm. If you would like to know if you qualify for a QLD stamp duty concession, make contact with a local law firm that specialises in conveyancing and they will soon be able to tell you how you stand.
Who Qualifies For Stamp Duty Concessions?
In Queensland, first time buyers do receive a stamp duty concession, however, there are certain conditions that need to be met. These would include that the property is to be used solely for residential purposes and that it must be occupied within specific time requirements, and also that the property cannot be liquidated for a given amount of time.
If In Doubt, Talk To The Experts
If you are unsure whether or not you qualify for stamp duty concessions, you should talk to an experienced conveyancing law firm who can very quickly establish your status. It is important to know how much duty you will have to pay if you want to be able to accurately calculate your total expenses, and any good conveyancing solicitor could help you with this. If you have no experience with land acquisition, the law firm that you engage will offer invaluable advice, ensuring that you don’t pay any more tax than you should, and they will keep you informed every step of the way.
Helping The First Time Buyer
The state of Queensland understands how difficult it can be for a young couple to get their feet in the first rung of the property lawyer. These concessions are put in place to help first time buyers, who have many expenses when purchasing a property, and with the stamp duty amount depending upon the sale price, it can be a sizeable amount. Queensland is a very popular location for both retired couples and families alike, and with a growing industrial sector in Brisbane and the scenic beaches along this amazing stretch of coastline, land prices reflect the demand to live on the Gold Coast.
If you are thinking of relocating to Queensland, you certainly wouldn’t be alone, and by looking at online property advisers who can help you identify the best properties in the region, you will likely find the dream home and with a little help from a conveyancing lawyer, the home of your dreams will soon be a reality.