The ripe apple for investors part two, Brisbane: Oasis' Gavin McPherson

GUEST OBSERVER

In my last article, I’m not sure if I could hide my intense upside expectations for the Gold Coast.

Discussing South East Queensland more generally however, it would be remiss of me not to discuss Brisbane. In fact, let me explore Brisbane a little more intimately than the Gold Coast.

So while I am a firm advocate that while I believe Sydney and Melbourne growth has finished, please note in neon lights...this boom isn’t finished yet. It’s just moved north.

In my business, we have confidently purchased well over $150 million of property in South East QLD property since 2014.and with the next 2 years expected to look like Sydney’s past 2 years, we look set to confidently double or triple this number.

Of course, a ‘bubble’ is a term that I try and avoid using, because it tends to lump all areas in a region in the same basket expecting growth of, but for those that hold out desperately for a prediction, one might detect that I am not backing away from my recently held belief that the Brisbane and Gold Coast markets are about to explode.

Of course, this could give a false sense of security for those anticipating growth if they own in these areas, or future growth if they and investing now. A few points to be careful of:

I am a universal student of history...and history has always told me that markets always recover in a financial sense from a “bottom up” perspective. By way of example; everything that is in the low price band (ie: $250k - $300k) moves first. This then precipitates a net movement upwards in the market place as sellers who are displaced by this movement (and buyers who have been pushed up into a better amenity) now have pressure to buy in a higher price band. This is a quite natural phenomenon, and one that is entirely predictable.

If the above (“bottom up”) phenomenon works in a financial sense, the same can also be said from a geographical perspective. I call this part the “in/out” perspective. That is, those areas and precinct in the ‘epicentre’ of the action (usually a CBD) get the most attention, and eventually the outlying areas and suburbs realise attention from the market as buyers are displaced to more affordable areas in their search for value and amenity. Again...no conspiracy theory here to ponder. It makes sense right?

We tend to call this the “ripple effect”. I am happy with this term. What I am not happy about is the fact that the markets always behave in this pattern, yet we as investors seems to try and re-write the rule book each market cycle and wonder where growth will occur next? Why wonder? It has always been thus.

By way of example of the “ripple effect” taking place...I cite a property that my Buyers’ Agency purchased approximately 16 months ago in New Farm, Brisbane. A 2/1/1 in a small block of 10, we purchased this for $343,500 for our client. At today’s price in New Farm, we know recent sales point closer to $480,000...an almost 40% increase. 

Now, taking last year’s approximate capital growth figures of Brisbane (6-8% dependant on source)...one has to note that while New Farm statistics point to almost 25% growth, laggards such as Chermside (who carry the burden of being too overdeveloped) suffered a minus two percent (-2%) price decrease. Again, this demonstrates the “ripple effect” perfectly, despite creating confusion around the data on Brisbane’s growth and opportunity.  

Now of course, to suggest as a strategy of buying in the ‘next best’ district outside of what has just seen significant price growth would be disingenuous of me. It’s not that simple. You will need to still rely on specific data and features in particular areas that have a better chance of above trend growth in this phase of the market ahead. Furthermore, you need to be genuine about where those limitations might lie.

By way of example, areas that have become part of Brisbane’s urban sprawl like Logan City, are unfortunately, for me at least; a no go zone. I should emphasise...these areas will grow; that is not in question (just like Blacktown has in Sydney recently.) The problem is that their ‘once in a cycle’ uptick is almost always followed by a precipitous downturn and many years of stagnant growth afterwards, while the better areas general show a more linear (and upward) growth pattern. Furthermore, don’t get me started on your tenants you’re likely to encounter over that cycle.

The downside tenancy issues that often fester in cheaper housing in lower socio economic areas over the longer term can dwarf the upside of the high rents. High [potential] yields can be useless when you’re caught in tribunal QCAT or RTA) with a family not paying rent for 4-10 weeks every year with a property in the wrong suburb.  

I don’t say all this to be politically incorrect. I say it because a) I’ve made these mistakes and b) we are trying to make money, not win a Nobel peace prize! Stick to tried and tested areas. Over time, in fact, since biblical times...affluence has tended to breed more affluence.  Go with it. 

So my advice for Brisbane is to look for those areas where affluence is shown consistently in land values, yet still has a predisposition to growth in this current market.  My current tips are Paddington, Auchenflower, Spring Hill and Hawthorne in the $500,000 to $1,200,000 price range. Again, on the premise that “the cure for low prices is low prices”; I’m confident that these areas should reflect growth commensurate with their lack of development and absolute popularity for the districts.

And as for when...I’m expecting it soon!

Gavin McPherson is chief executive officer of Oasis Property Buyers Agency and author of "Value Investing in Property: What would Warren Buffet do if he was investing in property in Australia?" He can be contacted here.