Prestige property beckons the brave

After a slow 12 months, buoyancy has returned to the $1 million-plus market. With 134 suburbs boasting median prices in excess of $1 million, according to Australian Property Monitors (APM), many investors will be punting that these suburbs are a short track to easy riches.

In late 2009, are there never-to-be-seen-again bargains in Australia’s blue-ribbon suburbs? APM senior economist Matthew Bell says some of Sydney’s harbourside areas showed median price falls of 40% to June 2009, with other postcodes falling out of the $1 million-plus set altogether.

“This is actually quite unusual, and the bigger falls reflex the composition of sales more than actual value movements,” he says. “But I do think many $1 million-plus locales are primed for improvement in the next 12 months.”

There are some $1 million properties ripe for investment, but investors need to understand this market and have the resources required, because failure in the top end can carry big financial penalties.

Less than 5% of all residences are ripe for investment and this holds true for properties with a $1 million-plus price tag. Investors in the top end should focus on high land value areas and only look at three property types:

• Single fronted period homes.
• Well-maintained 1940s to 1960s duplexes.
• Modern apartments in impeccably developed small complexes within walking distance of village areas such as Toorak and Double Bay.

That’s right, three property types only. Buying someone else’s trophy house is a trap I’ve seen many would-be property moguls fall for, and an outsized French provincial in an Edwardian streetscape or a faux-Tuscan “dream home” with idiosyncratic floor plans is not a perceptive buy. If a property makes a statement, then as an investor the answer to the question “should I buy it?” is no!

Top end property serves a strategic purpose for the right sort of investor: someone with a well-selected, diversified portfolio. This sector generally leads the market during a recovery and at the peak of the cycle, providing above-market capital gains when other sectors may be missing out. And the higher value returns a greater amount of dollars. A $1.5 million property that enjoys a 20% growth at year one and year five with 10% for other years of the cycle looks a lot better than three $500,000 apartments realising a respectable and consistent 8% annual capital growth.

But playing in this space does not come cheaply. For many investors, this sector is quite simply a bridge too far and the 12 months to July 2009 have shown why. As intense pressure asserted itself on to financial assets courtesy of the global financial crisis, margin calls and depressed business income sapped confidence and liquidity out of this market. With prices dipping as much as 15% across the top sector, anyone solely invested in a $1 million-plus property would have felt very threatened; had they been forced to sell they would have suffered a serious loss. When the economy or the property market turns down, it’s the top end that feels the most pain.

Even in the best of times, this sector’s property can test the pockets of owners, as tenants paying $1,000 a week or more are notoriously fussy. European appliances, glass splashbacks, butler pantries, theatre rooms and al fresco dining in a well-kept garden are requirements, not luxuries. An interior that is “so 2003” or the faded fingerprints of the previous tenant’s toddler means results in property that’s likely to be shunned.

This is something investors trying to make the big play in an affluent suburb often underestimate – garnering a steady rental income from a $1 million-plus property requires an up-to-date product, meaning the owner needs serious cash reserves.

Finding the right top end property in the right suburbs costs $1 million in all major centres except Adelaide, where $800,000-plus is likely to be enough. In Sydney, you’ll probably need $1.5 million. In Brisbane and Adelaide, it’s the south eastern belt that’s most likely to perform, in suburbs such as Hamilton and Ascot (Queensland) Unley Park and Rose Park (SA). In Perth, areas such as Subiaco, Wembley Downs and Applecross are prime locations. (For more on the Perth and regional WA market see this report by RP Data.)

In Melbourne, perennial performers in the wealth belt form an arc across the east and south-east and include areas such as Hawthorn, Kew and Armadale. In Sydney, it’s the prime eastern suburbs and the lower north shore that are ripe for investors buying into this category. Yet the list of $1 million-plus Sydney suburbs includes many areas far from the traditional blue-ribbon suburbs.

Does this mean investors can find great $1 million properties away from traditional high-value suburbs? Not really. Although there are many outstanding lifestyle homes in these areas, this does not mean these properties will return above-market growth when market conditions are positive and when there’re challenging.

In many of the areas recently replete with $1 million price-tag homes, such as Warrandyte (Victoria) and Mt Barker (SA), properties may have many of the right attributes, but not all of them. Lifestyle homes without easy access to the city, top schools and shopping may be valued by some home buyers, but not by a relocating executive with a family in tow. Palm Beach in Sydney’s north is a classic example of this phenomenon: beautiful homes in a postcard perfect location, but yet just six months ago it looked like a developing into an investor’s black hole. Behind the fabulous vistas, there have been plenty of beautiful houses sitting untenanted for month after month.

Timing, suburb selection, housing type and price range are the keys to a smart $1 million-plus investment. Just make sure you are backed by other assets, invest for the long-term and get the property selection absolutely right.

This article was first published in Eureka Report.