What are the risks involved in buying in a 'hotspot'? Ask Margaret

Hi Margaret, 

What would be your thoughts on ways to mitigate the risks involved in hotspots? 

One such example would be Gladstone which has good strong fundamentals but is now experiencing oversupply.

The reason I am asking is that while a location is flagged as having good capital growth and yield,  I believe it is also important that I protect myself against overzealous developers who contribute to oversupply.  I am sure the above happens to many locations too.

Assuming that I've bought in a hotspot before a majority of the building stocks are dumped into the market, I might still be experiencing long periods of negative growth in a solid location when that happens.  I would be losing money if I sell out, but holding it would be extremely "painful".    

Thanks,

Adelyn

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Hi Adelyn,

The first thing we have to sort out here is ‘what is a hotspot’. 

Here, you say that Gladstone is an example of a hotspot. In reality, Gladstone is an example of an area that some property experts, and many property spruikers, have said is a hotspot. But is it?

In my opinion, no, but then again, this is just my opinion, and it will (often) be different than others.  I personally define a hotspot as an area which possesses an abundance of growth drivers, the capacity to experience ‘generational’ growth (where growth occurs steadily throughout an entire generation), a limited land supply, and very few people buying there as it has yet to be discovered and pillaged by the experts.

Growth drivers include things such as diverse employment opportunities, significant infrastructure development, low land supply and a population growing faster than the national average.

If we compared Gladstone to that description, it comes up wanting, and for that reason I feel that Gladstone does not qualify to be called a hotspot.  Instead, Gladstone is a speculative investment which requires precise market timing, both in and out. 

There are significant drawbacks attached to areas such as Gladstone – the single industry employment (mining), the itinerant and unstable population, the existence of too many developers selling properties at prices which bear no relationship to intrinsic value, to name a few. 

Investors with money to lose who are willing to gamble can make money in such a market but they must accurately read the micro economy to establish when to buy and when to sell. 

Ordinary investors attempting to create a sound portfolio which has an identifiable time frame (as in they know when they are likely to want to exit) should not be considering investing in such volatile markets where the fortunes are linked to an industry which is completely governed by the world economic situation.

The other thing to remember is that the word ‘hotspot’ these days seems to apply to the areas being written about by the ‘experts’. 

I can assure you that if it is being written about, you are far too late to be buying there. Thousands of people are reading the same report as you, and many of these will attempt to jump into such a market, at the same time.  This creates an upward pressure on prices and seems to justify that the area is actually a hotspot after all!

It’s a little like insider trading for shares – let the word out, everyone buys in and makes it look like the share is good after all, when in fact it is the market pushing up the price, not the underlying value.

The best way for you to be sure that what you buy is actually a sound investment, with the capacity to perform year on year, is to learn how to choose the right area yourself. 

In this world of instant gratification and busy lives every one wants someone else to do it for them - tell them where to buy, find a property for them, or worse, sell a property to them.  This is the best way to set yourself up for a poor or inappropriate buy which performs less well than  you would have liked and leaves you vulnerable to market falls. 

Learn what really makes an area perform for the long-term, and you’ll be able to scour the country and choose areas which are pre-hotspot, long before you read about them in the magazines.

Regards, 

Margaret

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