As a property investor seeking maximum rental and capital growth, you need to invest in property which is high in demand, yet also has limited supply. So what drives demand and supply in real estate?
When assessing property for potential investment, it is essential to pay attention to demographic and social changes that influence where people want to live and what kind of property they want to live in.
An example of social change is the lifestyle preferences of today’s Australians. Collectively we tend to view ourselves as more sophisticated than we did a couple of decades ago. The “I culture” is proving to be popular, as is the attraction to reside in locations near water. Investors would benefit from capitalising on these preferences by investing in property near “I” strips, close to rivers, beaches or harbours, and in inner city locations rather than rural locations.
Another factor which is responsible for driving demand is demographic trends. Many baby boomers have the view that the prosperity they have worked hard to create is for spending on lifestyle. As a result, many are trading their large suburban homes for smaller lifestyle-oriented properties located close to the ocean or near café strips. Many “generation X-ers” are also motivated by lifestyle – generally they are delaying marriage and family to allow themselves to achieve their goals. Single person households are also on the rise. These demographic phenomena point to smaller, lifestyle-oriented dwellings being in high demand over the coming years.
A rise in professional, dual income households with no children or fewer children later in life heralds an emerging group with money to spend on ensuring that they live close to good amenities, including transport, schools and the workplace. However, close proximity to transport and the workplace will become less important as the trend to work from home and spend less time at the office continues to grow.
When considering factors which drive demand, investors should ideally look for properties that appeal to both owner-occupiers and tenants. Bear in mind that these days, many of the features of a property that are valued by owner-occupiers are also sought by tenants. Bedroom size, a usable kitchen, storage, car parking, and other such features are just as highly valued by today’s tenants who will pay good rents for these features.
Most investors consider demand when assessing a potential investment, but fewer consider the supply side of the equation. Oversupply has the potential to jeopardise that important growth you are looking for when investing in property for the long-term.
Essentially, you should think about how easily your investment can be replicated by others, or in other words, how much competition your property will have. In any market, where there is high supply of a commodity (your property), potential consumers or users of that product enjoy more choice – therefore your ability to command a premium price is reduced.
Areas on the fringe of suburbia, with large tracts of undeveloped land nearby are a good example of this. It can be difficult to achieve a high price for a property in such an area when similar properties are readily available in new land subdivisions nearby. It would be better to have a property in an established area with high demand and little room for expansion. Similarly, high-demand areas that are “land-locked” by hills or bodies of water can limit future supply and put upwards pressure on prices.
It is also important to keep track of zoning regulations in the areas you are interested in investing. Residential zoning is used by local governments to regulate housing density. If a locality you are interested in is zoned to allow high-density apartments or townhouses, there may be too much supply, or potential supply of these types of dwellings to give your investment the growth potential you seek. It is very easy for others to build properties much the same as yours nearby.