Capital Growth and Bluechips

[Dis]

I'm reading "Streets Ahead" by Monique and Richard Wakelin. They strongly advocate purchasing bluechip properties which they define as "Double in value at least every 7 - 10 yrs" (over and above inflation). They focus on close to the CBD as the best place to look for these properties (and seem to give little respect to the outer suburbs).

Property stats are hard to interpret as they look at the capital improved value of the land (ie its hard to know the land content of a house in Richmond vs Ringwood). For people who have been around a while, could you shed light on the following scenario:

Property A
Inner suburbs
Total value $1,200,000
Land Value $600,000 (50% of total value)

Property B
Outer Suburbs
Total value $600,000
Land value $300,000 (50% total value)

Property C
Outer Suburbs
Total value $400,000 - older property
Land value $300,000 (75% total value)

Which type of property would you buy if you had $1.2 million to invest (Ax1, Bx2, or Cx3). While its hard to comparere apples and oranges, assume the following:
a) You are holding for the long term
b) You are prepared to support a -ve cash flow if needed
c) There are no special circumstances in any of the suburbs (new infrastructure, gentrification, etc).

 

[Brenda Irwin]

I would choose A. Since I would be up for land tax with either A,B, or C, I would sooner have just one lot of maintenance, one lot of council rates and one lot of insurance. I would, unfortunatly, only have one lot of rental income, but hey, you did say -ve cashflow wasn't an issue.

Incidentally, I have a friend who has owned an IP close to Bris CBD for 30yrs. It has averaged over 12% capital growth and seldom been vacant.

 

[alexlee]

Which type of property would you buy if you had $1.2 million to invest (Ax1, Bx2, or Cx3). While its hard to comparere apples and oranges, assume the following:
a) You are holding for the long term
b) You are prepared to support a -ve cash flow if needed
c) There are no special circumstances in any of the suburbs (new infrastructure, gentrification, etc).

Cx3. Lower impact of vacancies (unlikely to have all 3 properties going vacant at the same time), more land concent, more scope for redevelopment (I can redevelop one and still have rent coming in from the other 2).

Re land tax I would spread those properties around states. I also think it's easier to rent out a $400k property than a $1,200 one (where the market is pickier and more volatile).
Alex

 

[The Y-man]

Dis,

I understand the issue in this argument for buying closer in to the CBD (i.e. zone 1) is one of volatility. While I haven't sat down to look at the figures closely, my understanding was that the further out you got, the more volatility (i.e. higher peakes, lower troughs, steeper climbs and steeper drops) you have.

Cheers,

The Y-man

 

[gerd.]

C allows for reno upgrades for max return on rental & cap gain, as the value is so high in the land.

Cap improvements on a $ 1.2 Mil is outside the scope of most investors.

Gerd

 

[Dis]

Dis,

I understand the issue in this argument for buying closer in to the CBD (i.e. zone 1) is one of volatility. While I haven't sat down to look at the figures closely, my understanding was that the further out you got, the more volatility (i.e. higher peakes, lower troughs, steeper climbs and steeper drops) you have.

Cheers,

The Y-man

What they seem to be saying is that well selected property will average 7-8% per year while poorly selected property may average much less in growth (eg 4%). Over the long term the compond growth difference adds up to big $$$$!

This I agree with.

They go onto say that in most cases the only properties likely to do this are close to the CBD with about 60% + land component. The reasoning is that demand will always outsrip slupply because

(a)this is where people want to live due to the high levels of facilities, proximity to work, etc.

(b)most of the land is already at its highest developed value so supply is constrained


This I'm not so sure about. I agree with the high land component part. I'm more dubious about

a) Need to be close to the CBD.
The plan for Melbourne is to have activity centres. There will be concentrated pockets of employment, recreation, and other facilities outside the CBD. I have no doubt that CBD properties will be more than similar ones in the periphery, but will growth be any better ...

b) Land is at its highest developed use
Most of the land in Melbourne within the urban boundary is now built on. Yes, blocks in the (outer) suburbs can be subdivided; but likewise there is increasing apartment building at the city fringes.

I guess what I'm asking experienced investors is have you seen good (7%+) growth from properties in the ther peripheries. Ie individual properties you own have shown good (average longterm) growth. I cant work it out from readily from stats because they invaribly reflect developed land values. These can be skewed by renovation, an new housing estate, etc etc.

Talking to my neighbours who bought about 25 yrs ago on what was then then absolute fringe, they have seen their house value increase by 500%. They started with an $80,000 house and land package (buying new so they paid a developer's premium and also only had about $40,000 worth of land at the time). To me this seems just as good as the "blue chips" near the CBD.

 

[DavidMc]

Property A
Inner suburbs
Total value $1,200,000
Land Value $600,000 (50% of total value)

Property B
Outer Suburbs
Total value $600,000
Land value $300,000 (50% total value)

Property C
Outer Suburbs
Total value $400,000 - older property
Land value $300,000 (75% total value)

Hi Dis,

I think some of these figures are NQR in terms of the % of land value. A run down period style house in Richmond at around the $450k mark would be more $150k building and $300k land.

I'm guessing an old grand $1.2m place in Albert Park would be something like $300k building / $900k land.

An older 70's established house in Middle burbs area at the $300k mark would be more like $100k building and $200k land.

I don't really look at the established properties at around the $600k mark in the middle burbs but I would imagine these would be something more like $200k building / $400k land split.

A new house and land package around Narre Warren at $300k would be soemthing like $150k building, $150k land.

Property B in the middle ring burbs, typically I don't think you'd would find a $300k building on a block of land that is worth $300k (with the exception of a special new building, maybe?).

What do other people think? I'm sure I haven't got it exact but I think the above figures are 'more like it'.

Whatever it is, I think it's something very much worth figuring out. I once heard that the land component of a property grows at around the 13% mark.

My 2c.


Regards,

David.

 

[tonyd]

Property A
Inner suburbs
Total value $1,200,000
Land Value $600,000 (50% of total value)

Property B
Outer Suburbs
Total value $600,000
Land value $300,000 (50% total value)

Property C
Outer Suburbs
Total value $400,000 - older property
Land value $300,000 (75% total value)

Given reasonable estimates of capital growth, rent/vacancy estimates, you could use PIA to look at the expected long-term return from the different portfolios. This assumes you aren't going to add value.
Anyone keen to run the numbers?

cheers, Tony

 

[Dis]

DavidMc,

I'm guessing an old grand $1.2m place in Albert Park would be something like $300k building / $900k land.

Yes I should have included something like this as another option (75% land component in the inner suburbs)

Option A and B are looking at newer housing with a 50:50 land:builing ratio. Price tag not so important (eg it could be a 400k inner city appartment), more so the land component. I just chose a $1.2million house as an example because I didnt want to get into the unit vs house debate.

I don't really look at the established properties at around the $600k mark in the middle burbs but I would imagine these would be something more like $200k building / $400k land split.

Alot of people dropping big houses on small blocks now. Blocks in Manningham and Waverley are about 300k (depending on size) and people are spending similar amounts on the house. Obviously the ratio gets better the older the house, so I guess it depends how "established" we are talking.
http://www.mirvac.com.au/forsale/VIC/waverley_park/now_selling.html


Gerd,

Given reasonable estimates of capital growth........

Hehe, this is just the factor I don't know. What is the capital growth of land in the outer 'burbs?

 

[see_change]

are you sure ??

I'm reading "Streets Ahead" by Monique and Richard Wakelin. They strongly advocate purchasing bluechip properties which they define as "Double in value at least every 7 - 10 yrs" (over and above inflation).

??

Double over and above inflation ?

Are you sure about that bit ......

Unless I'm mistaken ( and that's quite possible ... ) when people talk about properties doubling , they're talking about the value in dollar terms , not above inflation . It effectively is inflation that causes the majority of the increase in value.

When every I've compared property increases over time, I've found that the percentage increase in blue chip / outer suburban values is similar .

If fact if you pick your time in the cycle , because outer suburban and regionals tend to be more volotile ( ie they go down further in the slumps ...), you can get a bigger percentage swing in those in a cycle than in than blue chips......

Blue chips have their place , but so can the " lesser " IP's

See Change

 

[alexlee]

I agree with See Change. Isn't that 'doubling' thing usually referring to nominal (before inflation) value increases? If you assume long term average inflation to be 4% (low, probably) then a 7-10 year doubling would require 11% - 14%+?

Surely suburban properties can have scarcity factors too. Parks, train stations, shopping centres: those aren't going anywhere, and they'll contribute to the value of the property.
Alex

 

[The Y-man]

Oh, BTW, don't get Spiderman started on Monique W....

Cheers,

The Y-man

 

[see_change]

Oh, BTW, don't get Spiderman started on Monique W....

Cheers,

The Y-man

I'll have to do a search......

Didn't take long
http://www.somersoft.com/forums/showpost.php?p=216086&postcount=24


See Change