Number-2Area/Market Analysis

Once a strategy is set in place, we then must invest in an area that will deliver on the strategic objective. Analyzing an area, or market, is about understanding the economic position of that market today, and where it is likely to be in ten years time. Mainstream media will often show news articles of ‘Boom’ suburbs and ‘hot spots’, however this is dangerous to the investor as these articles and news stories are retrospective, that is, they focus on past growth and well performing suburbs and areas. What we do as investment advisors is predict growth, and invest in areas and markets not based on past growth, rather future growth. How do we do this? We do this by understanding what drives growth within a market, and possessing the knowledge to not only gather data, but also interpret it. Interpreting data is one on of the most powerful skills you can attain within the property industry. Many companies, journalists and commentators present trends and data however do not know how to interpret it or what it means, both for todays market and the market in ten years time. This is dangerous for the investor as it can cause misleading information, and worse it can cause an investment into the wrong market, based on the wrong information. At Pinnacle property, we carry out extensive market analysis and research into areas that we feel are worthy of investing. These areas most commonly have a sound foundation of economic diversity and prosperity, as well as projected population growth due to livability. The analysis we carry out on an area is based on the following indicators.

Supply Limiters

Supply is the enemy to demand. An increase in the supply of dwellings can drastically decrease the value of an existing dwelling in that market. Therefore it is important that an area has tight control over the new supply of dwellings. This control comes through council restrictions, such as zoning, density criteria, complying approvals, lot size limitations, floor space ratios, all which are found in council DCP’s and LEP’s.

Demand Drivers

The opposing force to supply, an increase in demand for an area can cause values to increase. Items that increase demand for an area include; government spending, new infrastructure projects, new job opportunities and job creation, upgrades to existing transport and utilities, new entertainment and leisure activities, new schools and educational facilities, and shopping and retail centers. Financial institutions also play a big role in the increase and decrease of demand, however this is generally a national effect, rather than a micro market effect.

Economic diversity, employment data and statistics

In general, greater diversity in a local economy makes it less vulnerable to economic downturns and less risky as a location for investment. An area that depends on a few large employers or a single industry (such as mining) will be more vulnerable to recession. Employment data is required to understand the types of jobs within an area, and more importantly, the mix between professional and labor jobs, or skilled and unskilled workers.

Timing and price cycles

Timing is a key aspect to understanding when and where to invest. Timing is all about research. Our role as investors is to project growth, rather than listen to mainstream media that will almost always focus on previous results and growth in retrospect. Our job is to research where future investment is occurring, in items like infrastructure, transport, retail centers, and jobs. This will allow us to invest before the market takes off, capitalizing on the growth.

Risk

It is imperative in the investment process that you understand risk, and more importantly understand how to mitigate this risk. Risk can be broken down into five key areas; Economic risks, liquidity risks, political-legal and environmental risks, business and management risks and finally financing risks. Our investment process analyses every property against these risk factors, in order to ensure the longevity of the asset. Demand to Supply ratios is also analyzed from the following indicators.

Vacancy Rates

Vacancy rates is one of the most useful indicators of a suburb or area. Tight (low) vacancy rates represent strong demand from renters to reside in the area. This is vital for the longevity of an investment. A vacant property is returning nothing, and costing you money.

Vendor Discounting

This relates to the difference (if negative) between the asking price for a property, and the eventual selling price. If a property was for sale for $100,000.00 and it sold for $90,000.00, the discount rate would be 10%. We as investors look for suburbs that have very low discount rates, to ensure high demand for the area. It is a slight contradiction, as our job requires that we attempt to purchase the property for a discounted price for our clients, however we understand that good properties don’t accept discounts, and paying a fair price for a good property is always worth negating the possibility of a small discount.

Auction Clearance Rate

This relates to how many listed properties on a given weekend is sold at auction and how many are passed in. High clearance rates indicate a strong demand for the area.

Yield

One of the most important indicators for an area. Any investment, whether stocks, property, bonds or otherwise are all designed for one thing first and foremost, that is, to provide a return. The yield indicates this return. A gross yield around 5% indicates a strong return, however what is more important and often not calculated is the net return, which factors in ongoing running costs.

Proportion of renters to owners

As it states, this is simply a proportion of who owns the homes they live in within an area, and who rents them. It is important to invest in suburbs that have a higher number of owners to renters, for two reasons. The first is that people who own their home are more likely to maintain it and keep it looking attractive, therefore the street appeal and suburb appeal remains high. The second is that when it comes time to sell the property, owner occupiers will generally pay slightly more than investors to purchase a property they will live in, so you will likely get a premium on the sale price.

Days on Market

Relates to the number of days a property remains on the market until sold. The shorter the time, the higher the demand.

Stock on Market %

The SOM% is the percentage of stock on market. For example, if there are 1000 properties in a suburb and 10 of them are currently listed for sale, then the SOM% is 1%. The SOM% is a supply indicator. The higher the SOM the more supply. Supply is the enemy of demand, so it makes sense that for capital growth to occur you want to find properties markets with low SOM% figures.

Online Search Interest

The OSI stands for Online Search Interest. The OSI is a ratio of the number of people searching online for property versus the number of properties available for sale. For example, if there are 10 properties listed for sale in a suburb and there have been 200 people searching for property in that suburb, then the OSI is 20.

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