How Do We Assess Locations?
Location is arguably the most important factor when considering the likely future return on a property. Yet much of what passes for analysis in this space is at best skin-deep, and at worst completely counter-productive. You’ll regularly see articles which talk about the top performing suburbs for the last twelve months, which as a predictive tool is about as useful as reading 3 pages of a book and guessing the ending from it. I also often hear about locations that are recommended because of one new piece of infrastructure, like a railway line, or because they are slated to have strong population growth. New infrastructure is useful, but is only one piece of the puzzle, and has often already been priced into the market. Future population growth within a suburb, on the other hand, is actually a major negative - yet it is constantly sold as benefit.
If we’re going to understand a location, we need to take a more holistic view. At Aquila Property Investment, we assess locations as part of our client’s investment strategy across 7 major criteria. This enables us to rank suburbs and make considered predictions about future growth. The 7 criteria - and how we measure them - are below:
EMPLOYMENT
While there are a lot of locations in Australia we’d like to live, there are only certain locations that will provide us with the means of doing so through a high-paying job. Locations with access to lots of high-paying jobs are likely to achieve stronger growth in the future, and suffer from less volatility, as there will be constant demand for property in these areas from higher income-earning buyers and tenants.
How do we measure it?
High median family incomes, solid historical income growth and low unemployment all help to signify that a location has good access to employment opportunities.
TRANSPORT
Accessibility to employment centres and other key services easily by car and public transport options are critical to a location’s appeal to buyers and tenants. We need to look beyond one piece of infrastructure here and take the whole transport picture into account.
How do we measure it?
We measure the distance of the location to the nearest CBD and assess the number and quality of transport options, including car, bus, train, tram and ferry.
SERVICES
A high quality of local schooling, health and lifestyle service such cafes, restaurants and gyms significantly enhance a location’s value. The more walkable these services are, the better.
How do we measure it?
Microburbs gives us a schooling, lifestyle and convenience score, and Walk Score ranks how walkable a suburb is.
AMENITY
Amenity is a hard to define but increasingly important quality - it’s one of those ‘you’ll know it when you see it’ criteria. It’s really about how pleasant a suburb is to live in. Suburbs with few main through-roads, low levels of density and construction, plenty of green space and access to water will score highly on amenity.
How do we measure it?
We assess the tranquility score of the suburb, zoning laws, owner-occupier ratios and crime rates. We’ll also take in account unique factors such as access to the beach, rivers, or national parks, or negative aspects such as being under the flight path.
Locations such as Coolangatta on the Gold Coast possess incredible natural amenity, although this is offset somewhat by higher density construction and a higher crime rate than the QLD average.
HISTORICAL PERFORMANCE
This is very important. While past performance is not always a guide to future performance, in property, consistent, long-term performance in a location has proven to be a reliable indicator of future growth. It doesn’t mean the numbers themselves will be repeated, but the factors that create value within a location don’t change overnight.
How do we measure it?
We measure the capital growth per annum houses and units in the suburb, over the last 25 years (not 1 year!).
FUTURE SUPPLY
Locations with limited future land supply, projected population growth below the market average, and no large increases in any one stock type will have constrained future supply of housing, which means less competition for your investment.
How do we measure it?
We assess the amount of available land within a suburb, and use the projected population growth figures for the next 25 years.
Locations with high projected population growth are the areas that will see the most new supply, and all things being equal should be avoided.
CURRENT MARKET
This is an important metric which helps identify the likely capital and rental growth of a location within the short-term.
How do we measure it?
There are numerous statistics you can use to determine the state of the current market, including stock on market, days on market, vendor discounting, rental yield and vacancy rate. We use a Demand to Supply Ratio score which helpfully aggregates 8 such measures into a single score - this is handy (although not foolproof) in assessing what the market is likely to do in the next 1-2 years. We also look at rental yields and vacancy rates to determine the health of the rental market, and break this down to specific property types to get a more accurate measure.
These statistics are, however, highly overrated as a way of predicting long-term growth. Short-term market measures do not provide a reliable gauge of a suburb’s performance long-term; for example if you followed the DSR Score, rental yields and vacancy rates you’d have bought in mining towns just before their peak, and lost a lot of money as a result. That’s why we assess 6 other criteria to make our judgment!