Blue-chip vs risk

Blue-chip vs risk

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Is it better to invest in a blue-chip location or one with greater risk?

Blue chip is always the clear winner, especially when investors are considering the long-term, according to Place Advisory.

“Generally speaking, at the end of the day, while high risk and high return areas will always put up a heavy fight, blue chip will prevail,” said Lachlan Walker, Place Advisory Director.

“Although a blue-chip location will be more expensive to buy into initially, the end results are well worth it.

“A blue-chip area is one that has consistently strong rental yields and steady long-term capital growth – it’s a reliable region that constantly delivers, but takes a ‘slow and steady wins the race’ approach.

“These regions will weather downturns and operate profitably in the face of adverse economic conditions, which help to contribute to their long record of stable and reliable growth.”

Mr Walker said blue-chip areas were traditionally classified as those within a 10 kilometre radius of a capital city’s CBD.

“A blue-chip location will almost always possess the stereotypical price drivers such as abundant public transport, parks and water and a flourishing cultural, restaurant and entertainment scene, which is typical of capital cities and inner-city suburbs,” he said.

“For this reason they are usually more expensive to buy into than other areas.”

While blue-chip areas are the favourite for Place Advisory, Mr Walker noted that there are some benefits to investing in more risky locations, which are typically cheaper but have the potential for augmented growth and subsequent high, but volatile, demand for renting.

“Risky areas are still serious contenders for investors,” he said. “This is an area that has the potential for a massive rental market, but differs from a stereotypical investor suburb.

“These locations often come onto an investor’s radar due to a particular occurrence – for example, increased job opportunities. But they have earned their ‘risky’ label for a reason – and the risk is that there are high peaks and troughs, and therefore the possibility that their growth could end as quickly as it has begun, sometimes with very little warning.

“This means investors aren’t able to exit this market with as much profit or as easily if the market changes.

“Taking a punt on the underdog sometimes pays off, however timing is critical in these areas, and remember, if it looks too good to be true, it generally is.”

Mr Walker noted that there were three fundamentals that investors looked for – population growth; infrastructure and government investment; and employment opportunities and diversity – and blue-chip suburbs had all three, while a risky area may only possess one of the three factors.

“For example, a mining town will have multiple employment opportunities, but they do not have the growing resident population to give them that ultimate security as a long-term investment suburb,” he said.

“In the situation of a mining town, very often the increased use of fly in/fly out workers means the resident population is located well away from the mine.”

A case study: Brisbane vs Gladstone

The differences between blue-chip locations and risky locations can be illustrated by looking at Queensland’s capital city of Brisbane and the regional town of Gladstone in central Queensland.

Brisbane

Brisbane of course is the blue-chip capital city and Gladstone, a mining town, is the ‘risky’ location.

As Australia’s third largest city, Brisbane is the central employment node and key business district for South East Queensland, notes Mr Walker.

“It is the state’s hub of commerce, professional services and industry,” he said.

“Over recent years Brisbane’s property price growth has slowed considerably against its southern counterparts, creating the ideal buyers’ market today, but Brisbane’s population is still expected to grow by over 9,000 people each year; meaning there is an underlying demand for new homes and rental accommodation.

“According to the SEQ Regional Plan, there is a forecast need for at least 138,000 new infill apartments to meet Brisbane’s predicted population growth, illustrating that residential property is in hot demand.”

According to RP data, last year home values in Brisbane rose by 3.6 per cent in the three months leading up to December, and over the past decade, the city has recorded an average annual compounding growth of 3.7 per cent. Meanwhile, over the past 12 months, house values in Brisbane have increased by 5.3 per cent and unit values have risen by 3.5 per cent.

Based on RP Data’s figures, there were 9,639 Brisbane house sales over the three months to October 2013 and 3,671 unit sales.  Currently, the median house price in Brisbane is $470,000, while the median unit price is $383,000, with rental returns of $426 per week and $408 per week respectively.

While Brisbane has seen its fair share of struggle during the GFC, Mr Walker said, the city is home to more than two million people, and the high percentage of owner-occupiers that call Brisbane home continued to reside in the city through times of financial hardship, with the rental market even strengthening.

“Yes, the top end suffered losses from those who over extended themselves, but Brisbane’s middle market continued to transact as people took the opportunity to trade and upgrade,” said Mr Walker.

Gladstone

In recent years Gladstone has grown substantially as a regional centre, catering to major industrial and mining-focused activities.

The resource boom has been the major contributor to the town’s residential real estate growth over the past 10 years. The Port of Gladstone is the fifth largest multi-commodity port in Australia and the world’s fourth largest coal exporting terminal, and consequently the city has become a natural distribution point for the worldwide shipment of resources in the central Queensland region.

However, with reliance on this industry, the Gladstone real estate market has been adversely impacted by the uncertainty surrounding the mining and infrastructure investment in the local area over the last two years, said Mr Walker.

“This uncertainty resulted from a significant decline in employment opportunities and is reflected in the ongoing decline in the level of sales transactions,” he said. “Unlike Brisbane, Gladstone is a rare example in the Australian property market that defied the immediate wider Queensland market contraction post GFC, only to suffer the effects of a mining recession years later, and arguably to a greater extent.”

From 2008 to 2011 continued apartment sales across the Gladstone market peaked with figures just short of 10-year highs. The median price in the region followed suit and the demand in the local market drove sale prices quarter-on-quarter to peak at a historically high median price of $465,000.

“However, the market performance in Gladstone has been tightly linked to the demand resultant from the mining industry in the local area,” said Mr Walker. “Therefore, unfortunately as quickly as the Gladstone apartment market went up, so too did it go down”.

Unlike Brisbane’s recent stellar performance, the median apartment price in Gladstone at the end of the December 2013 quarter was $365,000, a softening of 18 per cent through the past 12 months.

In total, only 53 settled sales were recorded in the half year period ending December 2013, less than half the level of transactions for the period prior and well below the 10-year average of 143 settled sales every six months. The majority of these transactions were recorded in the lower price points with over 92 per cent of sales occurring under $299,999.

 

At Place, Lachlan Walker’s role is to provide specific product advice to clients by gathering internal and external market intelligence. He has extensive experience in property market research and has provided professional consultancy and advisory services to leading property clients including Valad Property Group, Lend Lease, Australand, Stockland, FKP, Leighton and Devine.

For further information please contact: Vanessa De Groot | PR & Communications Manager, Place