Supply: the forgotten part of the property investment equation
When researching the market, it is important to understand what demand drivers can push up property prices in the long term. But an often underestimated factor is the supply side of the equation.
An oversupplied market can jeopardise that important growth you are looking for when investing in property for the long-term. But how do you factor in future supply?
A first good indicator of a future supply issue can be uncovered by asking yourself how easily your investment can be replicated by others. In other words, how much competition will your property have in the future? This is important to know, as high supply signals more competition in the market, therefore your ability to command a premium price is reduced.
Take for example the areas on the fringe of suburbia, with large tracts of undeveloped land nearby. Achieving a high price for a property in these areas may prove difficult, because similar properties are readily available in new land subdivisions nearby.
If you are looking for capital growth, it is often a better choice to go for a property in an established area with high demand and little room for expansion. Similarly, high-demand areas that are “land-locked” by hills or bodies of water can limit future supply and put upwards pressure on prices.
It is also a good idea to check the zoning regulations of any area you believe is of interest.
Local councils use residential zoning to regulate housing density. An area that is zoned to allow high-density apartments or townhouses could raise some red flags, because development could bring an oversupply of these dwelling types to the area which could negatively impact your own investment plans. It is very easy for others to build properties much the same as yours nearby.
At Momentum Wealth, we carefully consider supply factors when assessing potential properties for clients. We identify localities in which there is likely to be little competition and we focus on properties with unique and highly valued features. We also tend to avoid areas in which there is a lot of free land for expansion while keeping an eye on zoning and development issues.
If you would like to learn more about professional research strategies, check out our new ebook ” How to find investment-grade properties using professional research principles”.
