Why infrastructure is important to your investment

As we look to what's ahead for 2012, Property Observer is republishing some of our most noteworthy stories of 2011.

When I first decided to develop property, I was overwhelmed and didn’t know where to start. I’d purchased four properties in Sydney and realised that I couldn’t keep buying negatively geared property, coming up with the shortfall required certainly puts the pressure on. By this stage, the major cities in Australia had become too expensive, so I began doing the figures on areas within a 200-kilometre radius of Sydney. The Hunter Region came up trumps.

I found that I could buy large residential lots of about 1000 square metres and develop them a lot more cost-effectively than if I were to develop in Sydney. Everything was cheaper, from the land purchase through to consultant fees and building costs. I also found the people there fabulous to work with. Most importantly, I found that there was a lot of infrastructure investment being made in the area.

Infrastructure investment is very important, as it stimulates the local economy by creating lots of employment and attracts more people to the area. Infrastructure projects create demand for rental property and other goods and services. As the projects progress, money is spent in the community and there is a flow-on effect to associated businesses. For instance, the local cafe sells more coffee and there is demand from contractors for convenience services such as laundromats and take-away food. Once the project is complete it adds to the local services. A great example of an infrastructure project is a new freeway being built, where the benefits may be to cut travel times, improve efficiency within the roads network, relieve congestion of vehicles in certain areas and attract more people to the area, as it will be quicker to access.

But you can’t just look at infrastructure investment when searching for a good location for your development; one of the other things you should consider is growth rates. The latest RP Data figures show that although values across Australia have fallen, New South Wales regional areas such as the Hunter and Illawarra are still performing well with median house prices up 2.2% and 3.6% respectively over the past 12 months. Both are in close proximity to Sydney, and this is a key reason for their standout performance.

John McGrath, CEO of McGrath Estate Agents, points out that Newcastle is a great example of an area growing for local reasons.

“It’s shedding its steel city image, and positive media attention is encouraging retirees, sea-changers and investors from as far as Melbourne, Brisbane and Sydney. Great value is available, and Sydney is just a two-hour drive. The median house price is currently $380,000, up almost 12% since 2009,” McGrath says.

Two weeks ago, the Newcastle Herald revealed figures from BIS Shrapnel that house prices are set to increase 18% in the next three years. It also states that residential properties in Newcastle are set to rise at the same speed as Sydney.

The Residential Property Prospectus for 2011-14 outlines an increased migration rate from Sydney, north to Newcastle and south to Wollongong, with Wollongong’s higher price levels resulting in a slightly lower growth rate compared with Newcastle and Sydney.

Sydneysiders’ migrations north and south are the result of a housing shortage in Sydney and a combination of higher prices and increased interest rates, according to the survey. It seems as though people are quite happy to commute to work one or two days a week to be relieved of the pressure of a huge mortgage.

When purchasing a property, we are told to “look for infrastructure”, so just what impact can an infrastructure project have?

I’m seeing right now a massive tightening of rental markets in two major Hunter towns I’m developing in. One town has a large coal mine that is being expanded. After many years in the planning, this expansion has been approved and now contractors are flocking to the area to work on the infrastructure required within the mine for it to expand. Once the project is complete the contractors will be replaced with additional full-time workers required to work the larger mine.

The other town is literally being put on the map by an interchange for a major expressway to be built. It’s a $1.7 billion infrastructure project, and the impact is being felt. All of a sudden we have seen McDonald’s, KFC, a new Coles supermarket and an Aldi store being built in this small town. Consequently, there are a lot of contractors working on the road works looking for rental properties and rental returns are increasing. Employment prospects are bright now in this small town.

Although we love infrastructure spend, other boxes the Hunter Region ticked when I was researching the area include:

- Proximity to Sydney

- Affordability

- Strong rental demand and low vacancy rates.

- Undersupply of new housing

- Strong population growth – Maitland has been the fastest-growing inland town of NSW for a few years running

- Diverse economy – although the mining industry supports the area, the wine, hospitality, tourism and retail industries are also providing many jobs

- Large lots of residential land

Developing property is challenging, and getting it right takes a lot of time and research. But we are lucky to have a plethora of information and statistics provided to us by qualified researchers, companies and the media. So it’s up to you to sift through it all and work out what may be a viable location for your property development. Good luck!