Capital City vs Regional Property Investing
A very popular question amongst property investors is: “Should I invest in regional areas or capital cities, or both?”. There is great debate on this topic, with many property experts weighing in with a wide range of opinions. I have outlined my personal thoughts below:
Capital Cities:
Locations: The major state capital cities near coastal areas in Australia.
Comprised of: Sydney, Melbourne, Brisbane, Perth, Adelaide and Canberra. (technically Hobart and Darwin are included, but I am only focusing on those capital cities with 1m+ residents for the purpose of this article)
Population: ~16 million
Capital cities are made up of the 6 cities above which are the powerhouses of the Australian economy. The latest Census (2016) revealed that two thirds of the population live in these cities and that they are growing at a much faster rate than the rest of the country. The rate of population growth within combined capital cities was 10.5% since the 2011 Census, whereas in other areas it was only 5.7%. Federal and local governments are also planning for an even greater proportion of city dwellers in the years to come!
Capital cities are the places most people want to study, work and live as they offer a greater range of education, employment and lifestyle opportunities. The key strength of capital cities is that they generally have strongly diversified economies with a wide range of industries. This means they are not susceptible to downturns within individual industries and they are also largely self-sustaining (simply providing services to the residents of the city itself). Wealthier inner city suburbs also have a higher capacity to withstand economic downturns, generally meaning less downward pressure on property prices and rents than those areas where the population is living on the edge of affordability.
Ultimately, property investment comes down to supply and demand. There is a limited supply of land in cities – if you draw circles within a radius of 5km, 10km, 15km and 20km around a major CBD, how much vacant land do you see? Not much, as these suburbs are already full of houses! As most people have a natural affinity to be closer to the CBD, this increases the scarcity of well located properties. Combined with the increasing population growth, this creates a healthy inbalance in the supply and demand curve and therefore drives strong capital growth.
I believe investors (especially those just starting out) should be targeting capital growth in the first instance, as I outlined in a previous blog post (link below).
Regional Areas:
Locations: Everywhere else in Australia!
Comprised of: Regional Cities (50,000+ population, diverse range of industries), Connected Lifestyle Areas (smaller populations, close to major metropolitan areas), Industry/Service Hubs (15,000+ population, performance strongly linked to industry), Heartland Areas (smaller isolated towns)
Population: ~8.5 million
Regional areas are made up of a smaller cities, towns and industry and service hubs all over Australia. There are 15 regional cities with populations of 100,000 – 1 million and 40 regional centres with populations of 20,000 – 100,000. The house prices are lower (and therefore more affordable) which is why they often attract the attention of potential investors. Regional areas have smaller populations and a less diverse range of employment opportunities - usually only limited to one or two industries (e.g. farming/agriculture/mining/tourism). If an industry starts to perform poorly, the whole town is affected (they are not self-sustaining but reliant on industry). Sometimes employment is seasonal and there is a high variation in economic activity throughout the year – for example in tourism and some types of agriculture. An investment decision in a regional area will sometimes only be based on a single infrastructure project, whereas in cities there are always a large number of infrastructure projects.
Some investors will argue that regional locations can outperform capital cities. While this is of course is true in some cases, don’t let the statistics fool you! An investment in the next property “hotspot” may perform well in the short term, however, will this trend continue over the medium and long term? Property has notoriously high entry and exit costs, you can’t just easily change every year or two to the most recent “boom town”. Generally it is best to hold for the long term and so you must ask yourself – will my chosen location continue to outperform over the next 10 to 20 years+?
For more sophisticated investors with strong knowledge of regional investing, it can be acceptable as part of a large, balanced property portfolio. There have certainly been some very successful investors who favour the regional/positive cashflow strategy.
Conclusion:
While some investors may be able to achieve good results through regional property investing, I personally don’t like to play this game, I would rather follow the general trend of urbanisation and in the footsteps of the millions people who are increasingly choosing to live in our largest city centres. I therefore believe capital cities represent the best option for the typical property investor in Australia going forward. They are proven performers with a consistent history of excellent capital growth. In addition, the high demand for dwellings should ensure that rents rise over time and deliver a decent yield in the long term as well. The strong population growth, diversified economies and large investment in infrastructure will ensure there is increasing demand for inner capital city locations in the decades to come.
Of course, this doesn’t mean that ALL capital cities represent a good investment option ALL of the time. Which capital city centres are the best to invest in? That is a topic for another day!
If you want to get in touch, please send me an email:
micahkg@gmail.com
Comments