018: 6 things you need to know about investing in Sydney property | The secret to living longer | Is it too late to invest in Sydney?
Dec 4, 2017
Today, we are going to spend some time talking about the Sydney property market.
Even if you’re not interested in investing in Sydney, there are some great lessons to be learned in this information.
Of course, many investors want to know what is happening in Sydney.
It’s Australia’s largest property market and price growth has stalled. People are wondering if now it the time to buy, sell, or hold.
I discuss what’s going on with the Sydney property market with Ahmad Imam, the Senior Property Strategist of Metropole in Sydney.
In my mindset moment, I share with you the secret to living longer which has been proven by research. The secret is probably not what you think.
6 Things Property Investors Need to Know Before Investing in Sydney
- For some, just hearing the words 'Sydney' and 'Property' in the same sentence makes them cringe. While others will see dollar signs and opportunity.
- It really depends on your personal experience with property in Sydney and whether or not you are an Amateur investor or an experienced investor that has seen this all before.
- Let's face it, we receive so much conflicting information on a daily basis from so many different sources that at the end of the day you don't know if your Arthur or Martha.
- The reality is, if you don't keep up with the media you are uninformed and if you do keep up with the media you are misinformed. Seems like you can't win.
- Don't get me wrong some points are valid and some can be completely dismissed, so let me summarize the points and provide 6 things property investors need to know before investing in Sydney.
1 – Entry Level Price for an a Grade Asset
- When investing in Sydney you must be prepared to pay a higher entry level price than Melbourne or Queensland.
- Entry level for an investment grade property in Sydney is $600K and climbing. Compared to an entry level of $400K in Melbourne or $350K in Brisbane. That's a difference of $200K in this current climate of affordability constraints and tighter lending conditions.
- Keep in mind you can of course buy properties for less than $600K in Sydney but they would not be investment grade assets and you would be compromising on location and as a result the long-term growth potential of the asset.
- Do not assume that an A grade asset in Sydney must be a house in the Eastern Suburbs on a big plot of land. An A grade asset is simply an asset that is both strong and stable.
- Strong in that it has wealth building rates of growth and stable in that it is in a location that does not fluctuate in value. As investors, we like to see nice, stable, linear and predictable growth.
- As well as detached houses or townhouses we certainly see strong and stable growth in well located apartments in small to medium density boutique complexes in Sydney.
- Manage your expectations and do not be afraid to buy an apartment in Sydney if that’s what your budget allows – as long as of course it ticks all the boxes.
- Do not also assume that a house is a better investment than an apartment if the house is 40km away from the CBD and has minimum growth potential. Yes, land is important but do not forget that not all land is created equal.
- Sydney is now a global city with a population of 5 million plus and as a result we are now starting to see it ‘Manhattanising’, and just like in Manhattan you can’t expect to purchase a big house on a big block, in the right location within your budget.
- I would much rather an average sized 2-bedroom apartment in the inner middle rings of Sydney with great growth potential as opposed to a large 5-bedroom house 40km away from the CBD with minimal growth potential.
- This is an investment after all so take emotion and ego out of your investment decision.
2 - Don't Just Look at Rental Returns
- In my experience most amateur investors look at 2 criteria when investing in Sydney property - the price and the rental return or yield.
- Yes, they are both important criteria and you certainly need to secure the asset at the right price but one crucial factor that amateur investors neglect is the average annual growth of the investment i.e. Capital Growth.
- The reality is there are 2 philosophies for investing in property. You can invest for cash flow, as in your rental return or you can invest for capital growth. One must be compromised.
- Ideally it would be great to have both but guess what? You can't have your cake and eat it too.
- Now I'm not going to go into a debate about capital growth vs positive cash flow however it's fair to say the further away you go from the CBD the more likely you are going to find a property with above average yield and you will compromise on capital growth.
- And the opposite applies when you invest within the inner middle rings of Sydney, you are more likely to find a property that has above average annual growth but you will likely compromise on the yield.
- The rental yields we see for the properties we like to buy in Sydney are approx. 3% - 3.7%, however the growth we receive on these assets outperforms the averages in growth of 7.5% in the long term.
- My advice is to do your research, pull out the calculator and do your numbers.
- If you have a long-term investment strategy then calculate the projected growth and value of an A grade asset over a 10 -20 year period and compare that to the growth and value of a secondary asset with minimal growth over the same period. You can't argue with the numbers. Capital growth is King.
3 - Do Not Expect the Same Level of Growth We Saw Over the Past 4-5 Years
- The last 4-5 years in Sydney has seen unrealistic levels of growth – growth well into the double digits in most cases, that have given many investors a false sense of confidence
- Growth has been so strong that even secondary assets in secondary locations have seen growth over the past few years – and now that the Sydney market is taking a well-deserved breather you can no longer expect this growth going forward.
- Sydney is a fragmented market and as a result we have seen stronger growth in the inner middle ring suburbs as opposed to outer suburbs of Sydney and this gap between A grade assets and secondary assets will start to widen more and more.
- And this will become even more apparent over the coming months as growth in secondary assets start to suffer and those who invested in secondary assets start to struggle due to rises in interest rates, tighter lending conditions and investors being previously on interest only loans now being forced into a principal and interest structure.
- Sydney’s outer suburbs are no doubt experiencing a growing population but do not assume that a growing population always equates to an increase in capital growth. You must look at the key drivers of growth including migration, spend on infrastructure, the high socio economic demographic and where they are buying as well as areas where people are willing to pay a premium to live – population growth is only one driver of growth amongst many.
- It is now absolutely critical that going forward you are buying A grade assets i.e. the right assets in the right locations as they will still continue to grow in the long term at realistic levels.
4 – There Is Only One Main CBD
- There is only one CBD in Sydney and every other “CBD” is secondary to the main centre.
- Yes, Sydney is decentralising and there is very clear consensus that Parramatta is being built as Sydney’s second CBD, followed by other large centres like Chatswood, Penrith, Hurstville and Liverpool to name a few, but they will not experience the same levels of long term growth as the inner middle ring suburbs of our main centre.
- If you wish to take a calculated risk, than you need to avoid hot spotting and speculation. Stick to the pockets that not only have the growth drivers but have shown evidence of long term growth and stability.
5 - Parking Space Is Preferred
- Welcome to Sydney, where we spend most of our lives behind a steering wheel.
- Yes, we have higher density living and better public transport than we did 20 years ago but do not underestimate the impact a parking space has on the growth of your asset.
- You do not necessarily need a lock up garage but at the very least you should seek a property with a parking space.
- A parking space will not only increase the value and long term growth potential of your asset but will also increase the chances of securing a tenant much quicker, reducing the vacancy in your property and as a result increasing long term cash flow.
6 - Sydney Airport and the Flight Path
- Unlike Melbourne where Tullamarine Airport is 23km from the CBD of Brisbane where the airport is 15km from the CBD, the domestic and international airport in Sydney is only 8km from the CBD and surrounded by residential suburbs. Hence why we have an airport curfew in Sydney which limits take offs and landings between 11pm and 6am.
- We of course want to stick to the same strategy of buying an A grade asset in the inner middle rings of Sydney metro but nobody wants a property directly underneath the flight path. So make sure you do your due diligence, no different from ensuring the property has the right aspect and that it receives relevant sun, make sure you're not being impacted by the noise pollution of being directly under the flight path.
- According to Sydney airport there are approx. 60,000 passenger aircraft movements per year, that works out to be an average of 164 aircraft movements per day.
- Given there is curfew between 11pm and 6am and flights are only operating for 17 hours per day that averages out to be 9.6 aircraft movements per hour or an aircraft movement every 6 minutes. Now I don't know about you but I don't want my dinner parties, BBQs and conversations interrupted every 6 minutes.
- There is nothing wrong however with being under the flight path as long as you are not impacted by the noise pollution.
Mindset Moment: The Secret to Living Longer
The number one scientifically proven answer to living longer is relationships. These are three times as powerful as exercise. Being part of a community and work relationships count.
Links and resources:
- Michael Yardney
- Metropole
- Metropole’s Sydney Office
- Rich Habits Poor Habits
- Property Update App
- Ahmad Imam
- Mark Twain
Quotes:
“An International investor coming back to Sydney after twenty years, just wouldn’t recognize it.” Michael Yardney
“You get your investment returns in four ways capital growth, rental yields, manufactured capital growth or renovations, and tax benefits and depreciation.” Michael Yardney
“Stop staring at your phone and go out and hug somebody.” Michael Yardney
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