Successful property investment requires vision

The property at 72-76 Bayswater Road, Potts Point is now 40 luxury apartments, next to the Vibe Hotel Sydney. The land was recently valued at $8.9 million. In 1982 my family owned this parcel of land there and had done for a very long time, in fact for over four decades. On the land they operated a 60-room bed and breakfast.  As people do, they grew weary of the property and the going concern of the bed and breakfast, therefore the duly sold the property for $200,000.  At the time, my parents spent the profit! My mother bought a Datsun sunny motor vehicles and a two-bedroom unit at North Bondi. Five years later 72-76 Bayswater Road, Potts Point sold for $4 million and has since re-sold again for more and now the land alone is worth over $8.9 million. 

So what did those original buyers understand about the property and the area that my parents didn’t? At the time Sydney’s Potts Point was very different landscape to what is today. Being the neighbouring suburb to Kings Cross it was the underbelly of undesirable activity. Being only two kilometres to the city, it was and is still a hotbed of action. 

At the top of Bayswater Road Potts Point, you have the most amazing views of the city and ability if high enough to see the majestic Sydney Harbour. I cannot help to feel that person who acquired my old family estate to be a visionary.  To see through the mist of undesirable activity and know that the property was a diamond in the rough would have taken a lot of market knowledge, surely?

Most people look at real estate retrospectively and those that do tend to be home owners not investors.  I think every family has a story about the property that got away from them.  Buying, holding and selling real estate takes some market understanding of the suburb the real estate is in and the suburbs ability to change.  In real estate we call this change to a suburb gentrification. 

The sole purpose of an investor is to turn a profit. Real estate is the only asset class that can be controlled by the people, its bricks and mortar, and it truly is “capital in the hands of the people”. No other investment offers the average Australian the ability to engage the powers of leverage and be able to have hands on self-managed approach to the owning an asset.  The challenge is usually not the ownership; it’s the lack of vision of the future that is the dominant mistake by amateur buyers. 

It is hard to imagine for those many who haven’t yet invested into this wonderful wealth creation asset,  as the assumption by many is that real estate is simply home ownership. The tone that is set by investors and visionaries in real estate is a very different to that of a home owner. Investors strive to invest where markets will grow and change and emerge for the better. Home buyers buy on affordability to nest. 

To understand where to invest in real estate, you need to follow the spending habits of government and the consumer habits of people and the places they inhabitant; success in real estate comes with understanding many aspects of the market in detail however one predominant  key to an investors success is researching or even scrutinising the town plan. 

See in the end, it was my family’s naivety to the “highest and best use” of the suburb that robbed them of an achievable small fortune. For in 1987, $4 million was a vast sum of money. Had they just learnt their local town plan, they would have understood the pending alterations to the town plan in Potts Point allowing zoning and infrastructure changes that eventually lead to the pursuant gentrification of the area! They surely would have held the property goldmine they were sitting on.....if they only knew! 

Town planning

Explaining and understanding town planning is sometimes a little technical, so the easiest way I think of it is as follows: the thousands of moving parts to a city, town or suburb and how these parts relate to one another. Quintessentially it is “the greatest good for the greatest number”. 

When factoring in real estate and the town plan, its bests to break down town planning into just a few sections. 

1. People
2. Places
3. Infrastructure
4. The state town plan
5. The local environment plan or LEP ( NSW Terminology ) and the development control plan or DCP (NSW Terminology )

The principle behind examining the town plan is that investors can find a better property in more sustainable areas if the locality is progressive and well planned. Extracting value through real estate is most easily done when the market does that for you. Ultimately you want to control assets, add as much value to them or have the market provide a value add to ensure the yields remain high for as long as possible. You don’t want to buy real estate and sell it unnecessarily though a lack of education on what is a progressive town plan and what is not.  Let’s examine some of the variables. 

People – Anthropology is the study of people. Demographics is a huge driver in real estate and within any culture there are groups that make up and drive the economy.  People have a huge impact on property prices.  The key is working out where they want to live next and what they are likely to spend their money on. I always find demographics fascinating as the trends are constantly evolving with time. Each generation has sub cultures that they form! 

These changes in household structure mean Australians have an increased desire to re-shape what property looks like and means to them. See the house sizes in Australia are getting smaller. Research shows that many people no longer want the quarter-acre block and within 15 years 30% of all homes in Australia will be single-person households. 

Demographic influences have a wonderful impact on property; study the spending habits of people and you are sure to find a profit! Understand where people see value next and you will find an emerging suburb to buy in. The areas town plan may have already begun to accommodate the needs of the emerging community and will act as a gage as to whether to invest or not. In the 1900s there were five people to a house in Australia, now it’s around two. Everything we do affects housing, for example divorce!  One out of three couples gets divorced, that rate puts pressure on the property market, now mum and dad both need separate homes. 

Places

Linking the study of people and social movements takes vision!  So why is it, that some of the grungy, cheap areas we all know about with high crime rates and undesirables, become the areas that are trendy and fashionable that eventually leads to  spectacular dwelling capital growth and high house prices. Places like Collingwood Melbourne, Redfern or Marrickville Sydney or Fortitude Valley Brisbane are good examples of urban renewal and gentrification at work. 

The real estate market exposes itself to value and opportunity regularly but not every suburb has value thrust upon it at the same time. In real estate there is an old phrase, “It is better to buy the worst house in the best street, than the best house in the worst street.” However I would like to coin a second phrase. “It is better to buy into a suburb that is a blank canvas rather than into a suburb that is a Picasso.” 

If an area is starting to be exposed to change but full change hasn’t yet occurred that is wonderful sign that capital growth will be assured in the real estate in that area! Bowen Hills in Brisbane is a classic example of gentrification that is yet to occur but surely will.  Located just two km to the CBD of Brisbane it is a solid market with an extraordinary future town plan. Yet, it is currently a “blank canvas”! Conversely other suburbs that are a similar distance to the CBD of Brisbane offer fine coffee and one can eat, drink and socialise with an array of merchants to choose from, these suburbs are bustling small pockets of activity. However these suburbs are already “Picassos”. In other words people are paying top dollar to live in the area and if you buy there, you are just paying for someone else’s capital growth. The science of understanding gentrification is to buy in a neighbourhood that is due to become the next great work of art. 

Infrastructure - Developers and governments spend billions of dollars on Infrastructure each year. They provide roads, schools, hospitals, transport, and commercial and office infrastructure to boost the needs of the community. And in doing so, re-shape and redefine the planning requirements for both the state and local government areas. You will find growth if you can locate this emerging infrastructure spend. Be sure the infrastructure is real and forthcoming through, and not fictitious stories, political propaganda or a fanciful hope. Check the town plan and government reports to validate your position. 

Aligning your investment next to huge infrastructure spends is a sensible way to gage future growth. I always consider where the public listed property companies are choosing to invest. It would be naive to think they do not have the best town planners working for them.  I follow their investments with great interest and work out how to buy for less in the same area. Governments and listed companies will spend a fortune, literally billions and billions of dollars influencing areas. Capturing that influence is a very smart way of buying property for the long term. 

State town plan - Each state puts out a plan or vision for the future. It is usually a twenty five year agenda of what the city will look like.  Economic hubs such as cities are areas of state significance.  Where people work is typically high on the radar, when considering a suburb to invest in, when considering the states town plan there is llegislation requiring the consideration of the environmental impact of the state driven development.  The state tends to control the following elements. Understanding these elements can help you understand a whole range of drives, such as supply and demand, economics and population movements and whether to invest in that state at all. 

At age 18 I was a real estate agent in North Ryde in Sydney, a government planning imitative the “Chatswood to Epping” rail link was touted to unfold over a three years period.  As a result of the announcement by government many Investors speculated and bought in the area based on the news. It took some six years before a track was laid and ten years for the infrastructure to be delivered. So the lesson is to buy just as they start the construction. I have never seen a major road or rail network half built! But have seen plenty of false starts. 

The local environmental plan and development control plan or DCP (NSW terminology)

LEP – Each local government area puts out a plan or vision for the future. It is on display within the council. It factors in many aspects and is very useful for understanding opportunities and restrictions of an area. This change can literally be street by street. So you need to get an understanding of it.   The single biggest change that can occur in the local town plan is height and density changes.  This forms the backbone of subdivision and extensions and adding value principles for real estate. 

Development control plan or DCP - Each area has a development control plan, so when factoring in the “highest and best use of real estate” you need to engage the plausibility of approval. In other words will the parcel of land pass the development consideration that need to be taken into account? If it does, you could well be on your way, to extracting a profit!

Some elements of consideration are listed below:

• Car parking
• Height limits
• Building lines – distance shadows etc
• Laundry facilities
• Water, sewerage, drainage and electricity
• Beatification of unused land – landscaping
• Minimum frontage and depth
• Minimum block size
• plot ratio – number of floors
• Density ratio – number of one-, two- and three-bedroom units
• Ingress and egress, ( in and out) driveway, right of way, walkway
• Fire ratings
• Covenants, caveats, encumbrances

Town planning is a key education requirement for your journey through investing. It can be the difference between selling a property for $200,000 or for $4,000,000. By researching carefully what attributes the people and a suburb have by exploring the areas ability to embrace change via the town plan you may find opportunity. Often suburbs can be targeted for re-gentrification after similar suburbs have been re-vitalised. Property can reap the benefits of this catalyst for capital growth. Seeing the potential and understanding an area and judging change will serve you well. 

The study of real estate fundamentals is important. It will serve you well and serve you for a lifetime. If people took the time to understand and school themselves in real estate practices, wealth would not just be for a select few. Town planning is an imperative schooling for all investors.

Sam Saggers is CEO of Positive Real Estate.