The professionals are chasing more predictable capital growth from property investment. They want capital growth from the market forces plus they want to amplify these results by manufactured growth via renovation or small-scale development. 

 

Small-scale development is typically block splitting, or from 3 to 30 units or townhouses. What do they need to consider to consistently achieve the results they seek?

 

The professionals study the different cities for patterns of capital growth drivers. They want to identify areas that are at the bottom of their cycle and about to move up. If these areas also have accelerators of growth such as new infrastructure, changing Government policy or strong economic growth even better. Then they seek to manufacture capital growth to further amplify their results and to reduce the time to delivery of the results.

 

Risk is our greatest adversary in small-scale development and we need to manage it carefully. We can reduce our risks through appropriate and thorough due diligence. During this process we need to carefully evaluate the facts to be separate speculation from early cycle investment.

 

We can also reduce risk through a sound understanding of the median price. The median price is the middle selling price for all the properties that have been sold in an area over a period of time. For example, eighty-seven properties were sold in Eastwood over the 12 months to May 2015 according to RP Data. The median price for Eastwood is the price of the forty- fourth property sold in Eastwood: the middle property in the sequence. Its value was $1.385M and this is the price point buyers associate with this suburb.

 

If we can buy property below the median price of the suburb, renovate it for a small portion of the difference between our purchase price and the median price, and through that renovation bring it to median value we have manufactured capital growth.  

 

In small-scale development the risks are higher and the potential returns are also higher. We need to find an area with a lower median price than the surrounding suburbs that has market capital growth and ideally capital growth accelerators. Then we can seek out small-scale development projects.

 

The median price for houses in the Brisbane Local Government Area (LGA) was $507,000 in June 2015 from RP Data. This is considerably less than Sydney and Melbourne, and also less than Perth and Canberra. The median price of Brisbane properties is below the capital city median price of $717,000. This meets our criteria.

 

If we were to find an opportunity within the Greater Brisbane that is below its median price with market growth drivers, and accelerators we would have a great foundation from which to manufacture growth.

 

The $1.1B Moreton Bay Rail Line is due to be commissioned in late 2016 giving residents of these northern suburbs train services to Brisbane CBD employment centre. This infrastructure increases the accessibility and brings the area closer to Brisbane for transport options. However, it is much more affordable than Brisbane.

The suburbs serviced by this rail line include Kippa-Ring, Rothwell, North Lakes and Mango Hill. North Lakes and Mango Hill have median prices of $450,000 and $455,000 respectively. Deception Bay is adjacent to North Lakes with access to all its new amenities, can access the train line at Rothwell, offers a coastal life style and has a median price of $318,000.

 

How long can a median price differential of $132,000 last in adjacent suburbs with new ‘once in a generation’ infrastructure changes? If we could amplify this opportunity by adding small-scale development what could we achieve? This is what the professionals do to create more opportunity. They evaluate areas with rising markets and lock it into a timeframe for delivery of results. Once it is completed they are free to re-evaluate the markets for their next investment. 

 

To learn more about manufacturing capital growth visit http://www.forrestercohen.com.au/manufacture-capital-growth.

 

Rosemary Johnston co founded the Property Investment Association of Australia, and has been a board member since 2002. She now is a property investment advisor at Forrester Cohen Professional Services.