Ugly duckling suburbs increasingly hard to find for property investors

One of the founding principles of good property investment buying strategy is “location, location, location”. Within this is the notion of the “ugly duckling” suburb. You know, the idea of buying in the suburb directly next to that new, gentrified, up-and-coming trendy suburb, but at a reduced rate, with the ambition being to piggy-back on to the success of the trendy suburb throughout the next property cycle or two. As a young modest investor myself (with an accordingly modest investment budget!), the ugly duckling buying strategy is one I've explored with keen interest.

In a heavily urbanised country like Australia – where more than two-thirds of our population resides in metropolitan cities – investors do indeed flock to these cities and the suburbs within them seeking out contenders for their investment dollars. Over the past 20 to 30 years, we've seen pockets of our capital cities shift through the gentrification process – most times for the better, but on occasion for the worse - and investors have cottoned on to this process too.

And so the ugly duckling cousin becomes  a prized possession, right? The problem is it is now very tough to try to identify suburbs that tick all the mandatory boxes (transport, employment, healthcare, social outlets and education proximity) that are the cheaper neighbours to established investment suburbs with proven positive track records. I say this because in order for a property to tick all the right boxes in an urban environment, we are realistically talking the sub-30-kilometre radius of both Sydney and Melbourne, the sub-20-kilometre radius of Brisbane, Perth, and Adelaide, and the sub-10-kilometre radius of smaller metropolitan cities such as Canberra, Hobart, Gold Coast and Darwin.

Take Sydney, for example. Ten years ago I was living for a brief time in Balmain, Sydney, itself already well into the gentrification process. However, what about neighbouring Rozelle, Lilyfield, Haberfield? Not so much. At least they were without question rife with gentrification potential as ugly ducklings. Here we are 10 years later and these ducklings have now grown into swans. The same can be said of smaller metropolitan cities. Take Hobart as an example. Ten years ago, suburbs like Newtown, Lutana, and Taroona were the ugly ducklings of already-gentrified Battery Point and Sandy Bay. But today, these suburbs have come the leaps and bounds those investors had hoped they would, and then some.

So what's next? Do we go do our due diligence on the ducklings around these suburbs? The problem is that the areas around these have already inflated to the point where they now overlap into the territory of other blue-chip suburbs throughout these cities. n the above examples, even their cousins – Sydney's Summer Hill, Camperdown, and Five Dock and Hobart's Glenorchy, West Hobart, and West Moonah – have virtually caught up already, due to their double proximity to other blue-chip suburbs besides the 'pretty swans'.

It leaves this observer to ask himself the question: have we seen the end of the ugly duckling phenomena in Australia? Should investors instead change their strategies to investigate the cheapest properties in the “pretty” suburbs as opposed to the “ripe with potential” properties in the once-ugly cousin (which now has been tarted up)?

Cameron McEvoy is a property investor and maintains a blog, Property Spectator.