Why property investments in capital cities will outperform those in regional areas

This may seem obvious, but I have to start with it. In order to create long-term wealth from property it will be important to own the type of property that will be in continuous, strong demand from both owner-occupiers and tenants in the future. 

That’s why recent population statistics from the Australian Bureau of Statistics are instructive to property investors. To understand what’s going on let’s do a quick Q&A.

How fast are we growing?

Over the year to June 2011, the country’s population is estimated to have increased by 1.4%, which is faster than almost every other developed nation. However, population growth has been stronger across the capital city markets (1.6%) than in regional areas (1.2%).

Where do we live?

Since 1996 there has been a steady increase in the proportion of the country’s population living in the capital cities and, given that the capital city markets tend to enjoy higher wages and have better job opportunities, this trend is likely to continue.

Today around 64% of our population lives in one of our eight capital cities. In fact, 60.9% of us live in the big five: Sydney, Melbourne, Brisbane, Perth and Adelaide.

What does this this mean for property investors?

I understand why some investors are attracted to investing in regional Australia – properties are cheaper there and some may even return a little positive cash flow.

While some better-performing regional areas have outperformed the poorer performing capital city suburbs, the trend is clear: in the long term, population growth and capital growth in property values in our main capital cities will eclipse growth in regional Australia.

I have always avoided investing in regional towns because of their heavy reliance on one or two industries to sustain their local economies and population. Remember, when those industries take a battering, it’s not long before local house prices start to bear the brunt.

Instead I look to invest in areas where property values will be driven up by a large and growing population base, a diverse economy and the scarcity of supply of well-located properties.

While there’s no doubt that the future population growth of our capital cities will create infrastructure and social problems, the fact that we all want to live in the same cities and, in general, in many of the same suburbs, will underpin the capital growth of properties in these locations.

What about changing demographics?

Interestingly, how we want to live is undergoing some radical changes, which means the type of property that will be in strong demand by owner-occupiers and tenants in the future will be different to the past.

In 2010 around 150,000 new households were created in Australia and approximately 65,000 of these comprised Gen Y singles, groups and couples.

Many choose to rent in shared accommodation in order to reside in the locations they favour, but can’t afford as a home buyer. These include the inner-ring suburbs close to our major CBDs where employment opportunities and a fast-paced lifestyle with plenty of recreation and entertainment facilities are the primary attractions.

The way we live today is vastly different to our parents.

People are getting married later in life and apartments suit their busy lifestyles. We’re working longer, we’re increasingly time poor and we’re starting families much later in life. This means proximity to work, transport, entertainment, cafes, shops and beaches is becoming more important than owning a piece of land.

With the number of Gen Ys looking for accommodation continuing to rise, rental demand for near city and inner suburban apartments will grow significantly in the coming years. And our old friend the supply and demand equation will ensure that rents for these types of properties keep rising, as will their values, as higher yields will entice investors back into the market and lifestyle attracts owner-occupiers.

But do apartments make good investments?

In today’s market apartments make great investments and in general appreciate in value equally, if not more, than houses in our capital cities. It should be fairly obvious that with more single households, two person households and smaller families this trend will continue in the long term.

With housing affordability becoming a bigger issue we are seeing an increase in the popularity of medium-density apartment living.

And this trend is likely to continue because it’s about much more than affordability. As I’ve already explained, significant changes in our population profile and lifestyle priorities are creating a strong demand for apartment living. At the same time, apartments are continuing to improve in design and size and are generally closer to the CBD than affordable houses.

What about the baby boomers?

Let’s not forget as baby boomers move into retirement they will also significantly increase the demand for townhouse and apartment living. Low maintenance, secure “lock and leave” living will be a priority for this demographic.

According to RP Data, capital city units and apartments only accounted for 25% of all home sales 15 years ago. Today, though, medium and high-density accommodation makes up around 35% of all home sales.

Now that’s an interesting trend, isn’t it?

In summary

If you’re looking for a great investment property you should seriously consider well-positioned, established apartments in smaller boutique blocks in our capital cities. Look for a property with an element of scarcity or maybe the ability to add value through renovations.

Then hold it as a long-term investment and reap the rewards.