Property Sauce AU

HOTSPOTS: A PHENOMENON WITHOUT FOUNDATION

Barely a day goes by without some report unveiling a new investment hotspot, a top ten hotspot list or some other variation of the hotspot phenomenon in an attempt to lure investors in a new direction. Despite this media fascination, the hotspot concept is fundamentally flawed and in some cases can even be dangerous for investors. When we evaluate an investment opportunity to recommend to investors, an area hotspot status does not even scratch the surface of the level of due diligence required. There are a whole range of other factors at play that, if not considered, may not only impact the success of an investment property significantly but can also make an investment in a hotspot suburb a recipe for disaster. Many so-called experts nominate hotspots based purely on past performance, taking into account price growth over a specified period and assuming the trend will continue. Regardless of the motivation of such experts, the simple fact is that location, while important, is not the only factor that influences the success of an investment property. There is no guarantee price growth in the past will be replicated in the future. Similarly, there is no guarantee projected future growth based on a particular circumstance will deliver the anticipated results. Consider the case of Ravensthorpe in Western Australia, a frequent inclusion on hotspot lists several years ago. BHP Billiton opened a $2.2 billion nickel operation in Ravensthorpe, attracting large numbers of investors looking to capitalise on the major uplift in residential demand, only to unexpectedly close the mine eight months later. Ravensthorpe population immediately slumped, prices followed suit and investors were left reeling as rental returns plummeted. This example is typical of the danger associated with investing in single commodity mining towns. It also demonstrates the negligence of an investment strategy based purely on location. What about factors including projected employment in the area, the quality and track record of the developer, the level of current and future infrastructure spending, and the propensity for neighbouring high density development that will directly impact competition for tenants and, eventually, buyers? There are many criteria that must be considered to ensure genuine security for an investment. A decision should never be made based on a postcode alone. There are many examples of good and bad investments within the same suburb, sometimes merely streets apart. One of our former sites, deNode Apartments in Surry Hills, is a prime example. You won't find Surry Hills on many hotspot lists. Indeed, an analysis of price and rental growth in Surry Hills in recent times is unspectacular. However, the deNode development has delivered an annualised return since May 2009 of nearly 29%, outperforming the Surry Hills average by over 20% and dwarfing the performance of most investment hotspots nationally in the process. Aside from its location in the more desirable part of Surry Hills, deNode benefits from a lack of competing development, high rise restrictions in the area, intelligent contemporary design and convenient access to infrastructure and amenities designed to appeal to the emerging tenant demographic of the area. One of the underlying problems with the fascination with hotspots is that  the median figures for a given area that the so-called experts refer to when developing their hotspot lists. In doing so, a plethora of other influential factors are effectively ignored.

Article by  Aviate Group, Level 4, 50 Stanley Street, East Sydney NSW 2010