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Why You Shouldn’t Chase After “Investment-Grade Properties”

You must have heard of the term “investment-grade property”. You may think that it’s only safe to buy an investment-grade property, whether going solo or with the guidance of a buyers’ agent. But let’s set the record straight: there’s no such thing as ‘InvestorKit-grade properties’. Chasing after these elusive properties is not a wise investment strategy.

Image for the article - Why You Shouldn’t Chase After “Investment-Grade Properties”
Why You Shouldn’t Chase After “Investment-Grade Properties”

“Don’t buy that property. It’s not investment-grade.”

“Less than 5% of properties in Australia are investment-grade.”

You must have heard of the term “investment-grade property”. You may think that it’s only safe to buy an investment-grade property, whether going solo or with the guidance of a buyers’ agent.

But let’s set the record straight: there’s no such thing as ‘InvestorKit-grade properties’. As a buyers’ agency ourselves, InvestorKit wants you to know that chasing after these elusive properties is not a wise investment strategy.

‘Investment-Grade Property’: A Marketing Gimmick

Do a quick online search for ‘investment-grade property’ and you’ll be met with a cacophony of definitions. Unlike universally accepted terms like ‘vacancy rate’ or ‘days on market,’ ‘investment-grade property’ is a chameleon. It changes its definition depending on who you ask. That’s a clear sign that it doesn’t objectively exist.

In reality, ‘investment-grade’ is a subjective label created by individuals who want to sell you properties or strategies they deem worthy. It’s all part of a marketing game to make things seem more sophisticated and convincing.

The Real Truth

The truth is, in the long-term, almost all property markets across the country perform well, no matter their absolute location or relative location (proximity to city centre, schools, public transport, etc.).

Absolute Location: The numbers don’t lie.

In the 20 years from 2001 to 2021, close to 90% of Australian’ LGAs with valid property market data have seen 5%+ compound annual growth in house prices; and more than half of them have surged by 7% per year or higher (below chart).

Image of 64f5c7dc0dbb872c79777d8c Count%20of%20LGAs

These impressive numbers aren’t limited to specific states or regions; they’re everywhere. Here are some examples:

– Isaac (Regional QLD): 11.2% p.a.

– Sorell (Greater Hobart): 10.3% p.a.

– Mornington Peninsula (Greater Melbourne): 9.2% p.a

– Burnie (Regional Tas.): 8.7% p.a.

– Maitland (Regional NSW): 8.2% p.a.

– Canada Bay (Greater Sydney): 8.1% p.a.

– Unley (Greater Adelaide): 7.4% p.a.

Source: CoreLogic

With so many LGAs achieving remarkable growth, can you still believe that only less than 5% of properties qualify as ‘investment-grade’?

Then what about the remaining 10% of LGAs that didn’t achieve even 5% annual growth?

These underperforming areas mainly fall into two categories:

1. Economies lack diversity. These cities rely heavily on one or two industries, such as mining, and when that industry decline, the whole economy suffers, leading to population loss, surging unemployment rate, and a downturn in the property market. Perth serves as a prime example of this rollercoaster ride. Perth’s economy and property market started a multi-year decline since the Mining Boom was over around 2014. It only started recovering in 2020 as iron ore prices rose.

2. Remote small towns. These towns have only a few thousand residents and lack active economies and property markets. Low demand, low transaction volume, and minimal growth are the norm.

Relative Location: Proximity isn’t Everything.

Some say investment-grade properties should be close to good schools, shopping centres, train stations, CBD, beaches, etc. Data proves that proximity to these factors doesn’t significantly impact value growth rates. While prices may vary based on proximity, growth rates remain largely unaffected (see detailed analysis can be found in this blog: Why These Common Locations Should NOT Be Your Focus When Investing).

Consider these two examples:

a. Seaside vs. Inland

Sydney is proud of its beaches. Manly Beach and Bondi Beach are among the most famous beaches around the world. How are their local SA3s’ house price growth compared to inland SA3s?

The below chart shows the house price trends in four Sydney SA3s: Manly and Eastern Suburbs – North are seaside with famous beaches; whilst Baulkham Hills and Ryde – Hunters Hill are inland.

Image of 64f5c81dcc39bc9a7615f74e Sydney%20SA3s

While Eastern Suburbs – North, where Bondi Beach is, and Manly, where Manly Beach is, are the two most expensive SA3s in Sydney, their house value growth rates over the past decade are just similar to the two inland SA3s.

b. Distance to CBD

Along the west coastline of Melbourne’s Port Phillip Bay, you’ll find these SA3s:

– Port Phillip: Less than 10km from Melbourne CBD;

– Bayside: 10km+ from the CBD;

– Frankston: 50km+ from the CBD;

– Mornington Peninsula: 70km+ from the CBD.

The below chart shows their house price trends in the past decade.

Image of 64f5c82fcc39bc9a76161583 Melbourne%20SA3s

Mornington Peninsula, though the farthest from the CBD, has achieved the best growth. The rest 3 SA3s’ growth rates are almost the same, despite the vast price difference.

More examples are available in the blog Why These Common Locations Should NOT Be Your Focus When Investing. All these examples lead to one conclusion: CBDs, beaches, train stations and other amenities are always there, as long as there are no major changes to them, eg. large-scale upgrade of a hospital, connecting a new metro line to an old train station, etc. their impact on surrounding properties would just be reflected by the prices, but not growth rates.

What Should You Do Instead?

Don’t let the subjective rankings confuse you. What you should do are three things;

a. Think long-term.

We all know that it’s not quick buy-and-sell that create wealth, but the holding. And as we discussed before, data has proven that Australia’s property market has the power to achieve healthy growth over the long term.

b. Set clear goals.

Assess your current position and define your investment objectives. Then, create a plan to achieve those goals. This approach keeps you on track, even when the world of ‘investment-grade properties’ tries to distract you.

c. Start Small, Grow Smart.

You don’t need a million-dollar house in Sydney to start. Begin with a more affordable property in a regional city, with a good yield. As your income grows and equity accumulates, work your way up the property ladder.

This blog is inspired by one of the InvestorKit Podcast episodes: Are Investment-Grade Assets A Load of BS? Listen to it here for some real-life examples!

InvestorKit is your partner in navigating this complex world. We help you formulate the best strategy to reach your financial goals, without peddling ‘investment-grade property’ myths. If you’re ready to clarify your investment goals and make informed decisions, click here and secure your 45-minute FREE, no-obligation consultation!

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