What effect will a land release have?

[Fish]

Hi All,

I'm hoping that I might tap a few wiser heads about the effects of a land release in a good semi-rural town area.

I have found a town which I would like to invest in ( good parameters and prospects) and have come across council's future plans for the area, including maps of proposed new land releases - land which has to date been classified as 'green zone' and nestled amongst the town layout. These plans show the release sequence - Stages 1a to 1s, Stage 2a to 2s etc.

Indications from development in the area suggest that these will be expensive estates with upmarket family housing, servicing those working on the fringes of outer Melbourne. It is a highly owner-occupier area with near zero vacancy rates.

Given that median prices in the older area of town are around $200-$240K, and that new estate housing typically has a median new-house price of $300-$350K -

Does the development of a ring of high-class estates around the town CBD automatically cause better capital growth around the lower-priced, town centre, and is this the best place to buy?

Should one look for a cheaper IP close to the first or second land releases - hoping to gain some momentum from a ripple effect?

Or does such a land release have the reverse effect - lower the value of housing in the area because land is now available for building - or does the difference in median prices between old housing and new housing act as a buffer, guaranteeing that the older style housing will still be in demand because it's 100K or so cheaper?

Thanks for your thoughts in advance.

Cheers
Fish

 

[DavidMc]

This is my take on it… (no doubt many will disagree).

Traditionally, it’s the scarcity of the high yield that drives up the price of property in regional areas like this. I’m guessing though in this area ‘high yield’ doesn’t exist anymore. So you need to ask why would people buy into this area now? If you can get in when the stage is set (i.e. a long period of no growth and 12-13% yields) then you could make a killing like many people on this forum (and my father) has. He has a couple of places in Traralgon and Korumburra. These places generally have long periods of no growth, then a couple of years of a ‘burst’. I’m not sure which area you are talking about, but I’ve lived in and have some experience in the Gippsland areas and the city of Casey. If you look at the long term growth of those areas, you’ll have 8-9 year flats, then 3 years of killer growth. It’s my view that the area you are talking about could be just at the start of one of these long flat periods, however (like anyone else) I could be totally wrong. I guess what I’m saying is include this into your calculations and see if you are still happy with the numbers.

Land releases are funny… on one had they will drive up the value of existing stuff in the banks eyes due to higher ‘comparable sales’, but on another had it’s an increase in supply, which generally drives prices down.

The newer places will give you better depreciation; however the older places seem like where the value is. No doubt they will have better access to the town infrastructure and provide better yield.

My advice, with that sort of cash you could get an excellent inner suburb bayside art deco apartment in a small boutique block with pretty much the same yield. Do the comparisons on the long term growth (historically), see what APM and residex reckon on future growth and see how they stacks up.

 

[Fish]

Hi Dom,

Thanks for the insight.
Some good food for thought.

It was the Drouin-Warragul region that I was looking at with the new land releases scheduled for in and around Drouin where there are very few rental properties on the market - as opposed to Warragul which seems to have had a large increase in the number of properties for rent.

Cheers again
Fish

 

[DavidMc]

Ah I see. I hadn't heard about that. I grew up in Paynesville and went to Uni at Monash in Churchill, so I know the region you're on about. I don't know much specifically about Drouin-Warragul but I remember my Dad saying it was always so expensive compared to Traralgon and Pakenham etc. Maybe you have parents or friends in the area, ask them what the prices were like in 2000, 1995, 1990, 1985, 1980 etc. The place we lived in in Traralgon for 8 years didn't move an inch. I was in grade 5 so it must have been around 198x. I purchased my places in Carrum Downs, built in Narre Warren South and Berwick (established). I did this because I knew the areas and knew the short term would be good. Now, with the benefit of hindsight, they were still good decisions but I would do even better with a place that has long term consistent growth which usually exists in the inner areas. I'd get around not knowing these places by using a buyers agent.

 

[Fish]

Thanks again Dom

Would you consider Paynesville / Lakes Entrance for investment nowadays? Given that they are sea-change and holiday type destinations with employment and services close by in Bairnsdale?
Or would you consider the recent hike in prices an indicator of some stagnant growth?

Also - I'd be interested to know why Narre Warren and Berwick might not be good for the longer term. Is it the fact that even though growth might be ok, it'll never be as high as inner city suburbs...thus your preference for more inner-suburban investing?

Cheers
Fish

 

[DavidMc]

Ahhh Paynesville... the memories... how that place has changed (and I'm only 27!).

I'm thinking Narre/Berwick/Casey won't be doing much in the next 5 years simply because the prices have shot up so fast and are simply waaay out of reach for the demographic that live there. Casey has the largest proportion of 0-4 year olds in the country, and you're average young family unit in the area might have a household income of 60k or so? (that figure came from my head... just from knowing my friends in the area). These people simply can't afford to pay a huge amount more than the 300k-350k that new house and land packages are at right now. Or maybe they wouldn't choose to pay $400+ per week repayments on places you can rent for $260pw (which is what my place rents for). It wasn’t that long ago (less than 4 years) that these places were $170k.

The other thing is the scarcity factor. There is still some land around to carve up. Open up a 2005 or 2006 Melways and look at all that white space around.

I had a chat with Micheal Yardney about this on another thread. You might find it interesting - http://www.somersoft.com/forums/showthread.php?t=23030.

I'm mainly looking inner at this stage for some diversification but I'd also say as I've matured as a property investor over the last 6 years I'm thinking it's the place to be (once you have a bit of equity and can use this to fund negative cash flows).

 

[DavidMc]

Would you consider Paynesville / Lakes Entrance for investment nowadays? Given that they are sea-change and holiday type destinations with employment and services close by in Bairnsdale?
Or would you consider the recent hike in prices an indicator of some stagnant growth?

I'm not 100% on what's going on down there. I wouldn't mind getting into the retirement village type market - my grandparents live in on in Cranbourne and it's had massive growth. When I go to visit them I can really see how they are the place to live when you are retired.

I personally wouldn't invest there for the reason you suggested. The area might do well, but this would be what I call 'taking a punt' and having a guess on what the future growth. I'd prefer to go for the more consistent steady growth.

On a side note - my girlfriends aunty and uncle have a place at Metung that they've been trying to sell at boom time prices for the last year.

What has the population trend been like in Bairnsdale? Are people moving into that area or moving out of it? I'm guessing it's out (slowly).