Aussie property investors have always liked to buy assets in or around capital cities, as they are convinced metro areas hold the key to growth and return.
Often, it can be a case of “I live in a city, so I’ll stick with what I know”, which is an attitude all sorts of investors struggle with.
But what happens when “what you know” is a market where the numbers don’t stack up? A lot of people have a fear of the unknown, but that can mean they miss out on great opportunities too.
One misconception is that regional properties may have decent cashflow, but they don’t have the prospect of future growth.
However, there is a place for regional and metro properties in any portfolio, especially for the sake of diversification.
Sure, metro areas have higher property price points and more active tenants, but this doesn’t make them free from risk.
Just look at the effects of Covid. When the lockdowns first began, there were suddenly no foreign students, workers or tourists in the cities anymore, which meant less work available and less demand from tenants.
Meanwhile, those who were able to work from home began to leave the city for the regions. This boosted prices and tightened vacancies in regional areas, while putting a dent in metro markets. If your portfolio was “all in” on the city at this point, you’d likely have taken a serious financial hit.
Of course, at other times, regional areas have struggled as metro locations have boomed. You never know what may be around the corner, so it’s best to spread the risk. Holding properties in both metro and regional locations will reduce your exposure to localised economic headwinds and fluctuations in property markets.
It will also give you the option to strategically sell one to pay down the debt on another, or to pick up a new opportunity… an option you may not have had if all your eggs were in one basket.
The capital growth myth
Metro areas are known for faster and steeper growth, but regional areas can offer decent quality at an affordable price point and with plenty of upside if you know where to look.
Anyone who has followed the philosophy of B.Invested founder Nathan Birch won’t only be looking at the average growth that a region will experience, but will also be drilling down to the value adding potential of a particular property within that market.
Yes, that market needs to be solid, but if you can purchase for below market value, you are earning equity on the way in. Your research may have uncovered value-boosting future infrastructure development in the pipeline that others don’t know about yet.
You may also find it easier to secure a great deal once you’ve found it, with less competition from other investors than in a city market.
Recent times have seen rising rents and tightening vacancy rates across most of the country but, just like value fluctuations, a more normal state of play for Australian property is to have varying market conditions from location to location.
The rivers of rental gold for landlords are bound to dry up at some stage and when they do, you may find more stability by having assets in various locations. It is also worth diversifying within the regional section of your portfolio. If there is a market downturn in a location affected by flooding, for example, there might be an uptick to offset that in a drier location, where the economy is driven by other factors.
Some states, regions or towns may offer incentives for outsiders to invest their money there. There may also be tax breaks or grants offered at state or federal levels. It’s worth looking into these as they can turn a so-so investment into a winner. State and Territory government websites will have details of any such programs, so add a trip to the relevant site when doing your due diligence on an investment opportunity.