Mastering supply and demand: part 3

In my first blog in this series I explained how the supply chain works and how you can monitor supply to master the market. In the next post, we explored demand and how it dictates up-and-coming hotspots. 

In the third and final instalment of the series, I will explain how you can implement the value chain in today's market to buy well and provide a case study of an investor who mastered supply and demand to create wealth. 

What are the steps to the value chain? 
At the bottom of the market
• Period of little activity and price growth
• Gross rents grow, as new supply is scarce and more people rent than buy
• Interstate and savvy investors enter market, recognising a bargain
• Smart developers begin land banking

As the market begins to recover
• Established market firms up
• Developers become more confident to develop and sell stock
• Local buyers slowly re-enter the marketplace

As the market begins to rise
• Rapid expansion in new dwellings increases
• Credit eases and lending is cheap
• Demand levels increase as local buyers gain confidence

As the market is hot or booming
• Available land diminishes as new dwellings take supply
• Build cost and development sites surge
• Property prices surge
• Yield compression occurs

Implementing the value chain today
Here are some things you may want to digest – if Australia maintains current levels of growth, the population is predicted to grow to 35 million people by mid-century. The supply chain of property isn’t stopping, but it will go through periods of lows and highs where investors can pocket profits. Here are some facts:
• Across Australia, the federal government is targeting 40 per cent greenfield developments and 60 per cent urban infill developments
• To keep up with population projections, Sydney would have to build about 1,100,000 apartments by 2056. This equates to more than 17,187 eight-storey buildings with 64 apartments in each
• Greater Brisbane, also known as southeast Queensland, will deliver 680,000 apartments or about 10,625 eight-storey buildings of 64 apartments by 2056
• The Brisbane CBD is essentially surrounded by 200 kilometres of community, stretching from the NSW border to the Sunshine Coast. Globally, it is one of the largest communities to service for a major city
• New generations appear to prefer urban living in Brisbane
• Melbourne unit supply trends are ahead of pace and a good example of what the next level of supply may look like for all Australian major cities. The plan is to build a further 1,100,000 apartments by 2056, similar to Sydney (above)
• Perth will deliver 620,000 apartments, which equates to 9,687 eight-storey apartment blocks, to meet population demands
• Adelaide needs to deliver 249,000 apartments and 88,000 detached homes. Adelaide has the best urban design plan in the nation for urban growth, but has the lowets projected population growth among the big cities

Real estate fundamentals may shift within 15 years. Right now, real estate isn’t necessarily competitive for developers because there is enough demand to sell just about anything at present.

However, consumers will soon shift their buying patterns to not only choose a locality they can afford, but also a more urban environment. Walkability, safety and proximity to amenities will be of huge importance as driving becomes more challenging. Sustainable and green buildings will be highly sought-after as society becomes more environmentally conscious.

Work-based urban areas will see typical second-rate areas become less desirable. Areas or buildings that are next to commerce hubs will become highly prized. Cultural urbanisation will occur, with a preference for living close to cafes. Living in architecturally significant buildings with access to a well-designed green space will be desirable as developers increasingly try to improve their standards. Access to infrastructure and transport will be high among people’s priorities.

We are one cycle away from seeing a change in consumer habits that affects the way supply is delivered. For now, my recommendation to investors is buy the best buildings in the best locations, even if it costs a little more than an inferior one.

Wait until there is a period of weak activity to get the best price and opportunity. The most desirable properties are and always will be those with strong resale appeal within any of the buying groups, not just one.

Investor case study 
Elaine Chase bought early in the Sydney value chain in St Marys, 46 kilometres from Sydney's CBD. The three-bedroom, 2.5-bathroom town house was purchased for $260,000 in January 2012 and has already grown in value by $95,000 in just over two years.

Elaine capitalised on the rising market as the Sydney boom reached the outer suburbs. She was confident this property would perform for several reasons: increasing demand because of job creation in the area; the limited housing supply; and the obvious yield compression.

“The rent of $350 per week at the time of purchase showed that the property was undervalued,” Elaine says. “It’s well known that capital cities produce more growth.”

Looking at the home’s previous sales, Elaine realised it had barely grown in value since March 2006, when it sold for $255,000. She recognised this property had been sitting at the bottom of the market for more than five years.

The yield compression (high rents coupled with low property values) as well as an exceptionally low vacancy rate of 1 per cent gave Elaine the confidence this property was about to boom. As affordable properties in the area were becoming scarce, Elaine swooped in to secure a bargain.

The deal paid off – the property rented the day it was bought and the value shot up to $355,000 in just 28 months.

Elaine suggests all investors can find this kind of opportunity if they look hard enough.

“Look for yield variation and a 6 per cent-plus yield. Low vacancy rates of at least 2 per cent or under are a must,” she says.

“Take advantage of low interest rates and buy now, as you can fix the loan at 5 per cent for five years. If your yield is 6 per cent or more, the property is looking after itself. When interest rates go up this won’t be the case.”