Where are the hotspots?

I get this question often. In fact, last night I was at a dear friend’s 50^th birthday party and one of her other guests asked me “Cate, you’re in property. What are your hotspots? Where should I buy this year?”.

I corrected him immediately and explained that I don’t do hotspots. I reminded him that property is a long game and picking areas for short term gain isn’t my thing. His response was even more concerning though. “It’s in my superfund and the money is there. So, which areas are about to boom?”

Firstly, a superannuation fund is supposed to preserve and protect our capital. It is a long-term investment vehicle and ASIC regulations are strict. Speculative investing is dangerous, and it’s discouraged. Loan to value ratios are only permitted at lower risk settings for this reason.

My new friend at the party didn’t seem to understand this.

But it did make me ponder the question that so many people ask me.

A burst of sudden capital growth is an exciting prospect for any investor, and I’ve experienced this in my personal investing journey too, but bursts don’t go on forever, and sometimes they contract back down. Price volatility can be tough on an active investor, particularly when they are relying on equity to fund future purchases.

One of my earliest property adventures could be described as a rapid growth acquisition, and happily it wasn’t a location exhibiting price volatility. I purchased my first home in Mordialloc in the 1990’s and this beachy suburb in Melbourne’s southeast had a rough stigma at the time. The Mordy Boys had tagged train stations and buildings with their graffiti efforts and locals were familiar with the gang. However, Mordialloc was changing, and it had all of the infrastructure and amenity that indicated gentrification was underway. I bought a townhouse off the plan for $155,000 and the construction phase was scheduled to a twelve-month window. The builder contacted me at the lockup stage and asked if I would sell it back to him for $185,000. I resisted and settled it and then sold it a year later for $214,000. Despite buying off the plan/brand new, it still performed over a very short period. Today Mordialloc is a highly desirable postcode with a vibrant cafe strip.

In my earlier years I jumped onto the Tasmania bandwagon after reading about Hobart’s hefty growth following 2003’s impressive national run. Unfortunately, I hadn’t looked carefully into the growth drivers and other metrics. All I’d done was refer to the short-term recent growth of the city. I paid $380,000 for a very cute little 1841 cottage in West Hobart, and the following ten-year period delivered very sluggish capital growth. Not only did my asset underperform, it cost a lot in maintenance expenses.

Time does forgive though.

We still own this and one other in Hobart and the recent capital growth surge has rewarded our patience.

The last of my attempts at hotspotting was just prior to my training and study to be a buyer’s agent. I secured an established property in Gladstone, just as major LNG projects were being announced in the port. I had geochemical engineering buddies who were involved in port dredging and Gladstone was their hot tip. This time, I did investigate Gladstone a bit further prior to purchasing. However, over the course of a few years, the $213,000 acquisition soared to a $690,000 bank valuation before toppling down to $160,000. An oversupply of housing, combined with changing FIFO workers (fly in, fly out), and stalled projects all conspired against property investors in the area. Gladstone’s performance can best be described as volatile and this property hasn’t performed all that well over the past decade and it has cost us in maintenance and vacancies too. Relying on a market to deliver growth that is solely based on infrastructure and projects can be risky.

Our best performers are those that have delivered consistent, slow-burn capital growth and firm rental demand.

Gentrification is an exciting wave to ride, but selecting a gentrifying suburb requires careful analysis and spotting more than one simple trend.