In this case study, the author assumes the role of a hypothetical DIY investor, who is researching the Camden Council property market. He is interested in investing in this area due to its proximity to his other investments that have performed well in the past. He recently obtained preliminary advice from an investment professional, whose rationale he would like to vet by doing his own due diligence using the HtAG platform.
I have obtained the professional subscription, have logged in to the website and navigated to the home page. The first thing we see is a map of Australia (screenshot 1).
Overall, which area one chooses to analyse depends on their investment strategy which subsumes considerations such as:
- the amount of money one is prepared to invest (i.e Max Median price filter on screenshot 2)
- the rate of growth the area is experiencing (i.e. is the area in decline, at peak, at bottom or rising – the ‘Cycle’ filter)
- and/or the median yield of properties in the area (for example, higher yield areas have a higher rental return which makes it easier to cover the property expenses and maintain/keep the investment long term).
The developed ‘guidelines’ can assist with the filtering of large amounts of data provided on the website. The returned searches can than be ranked based on “year on year” (YoY hereafter) capital growth as well as projected capital growth.
Although the map of Australia is presented as one big heat map, which permits me to drill down into areas that are experiencing growth of interest (juts as a proxy, red indicates a decline while green indicates growth), I decide to focus my interest on Camden Council located in South West Sydney, NSW.
Working with the Ranking Table
Scrawling down to the table provided underneath the heat map of Australia (still on the home page), I go to the “Council Area Search” tab. You can see the cut out from that area on the home page in the screenshot below. In the Council Area Search tab I type in ‘Camden’. The result returns the following:
The search result returns a table which contains property statistics of Camden Council. The information provided represents average statistics for all types of dwellings irrespective of number of bedrooms these dwellings contain. We can see that in the bedroom columns the result provided is ‘All’. We can also see that the council growth rate is declining (column 3). There have been number of 115 sales to date of all dwelling types (Column 4). At the time of writing this blog the median property value is $819K and the year on year changes, that is, the difference between this year and last year in the median price of a property in Camden Council is -0.84%. This means that the median value of a property in Camden Council has decreased by 0.84% in comparison to last year. Current gross yield is 3.30%.
Gross yield is derived by dividing the total annual rent with the price of the property, in this instance, the total annual median rent with the median value of property in Camden Council.
Using this example, we would have to know what the median rent is for Camden Council in order to be able to understand how the provided yield has been retrieved. This is where we come to optional toggles (screenshot below) which are available at the bottom of the table and which, if chosen, provide additional columns to the existing table retrieved from the Camden Council search highlighted in screenshot 04. The toggles are optional so as to avoid overwhelming the customers with too much data and statistics which can have an impact on understanding the meaningfulness and the connection between statistics presented in the table.
To continue with our example, clicking on the ‘Median Rent’ toggle, we add additional column to our table which now highlights the median weekly rent of $520 (screenshot 5). If we multiply the $520 by 52 weeks in a year, we retrieve a result of $27K of annual rental income. To subsequently retrieve the gross yield we have to divide $27K by $819K (i.e the median value of property in Camden Council) and multiply is by 100 to obtain the adequate percentage. The result retrieved is 3.30% as highlighted in the table (screenshot 5).
If we wanted to include information embedded in all toggles such as Median Rent, Median Rent YoY Change, Projected Median Rent and Projected Median Rent Change: the tabs retrieved would be presented in the following way:
Returning to other default provided columns, HtAG forecasts a decline in both the median price (-0.74%) and gross yield (from 3.30% to 3.16% which totals a -5% change which can be simply ascertained by adding other columns with the ‘Projected Median Rent Change’ toggle) In Camden Council. Furthermore, HtAG forecast confidence levels are market as high (last column) for this area.
The conclusion I would reach from the information obtained is that rents are declining faster than prices in Camden Council. The YoY decline for rents is -2.65% while for property values it is -0.84% as previously stated. In the same way, the information retrieved suggests that in quarter two 2022, the rents will decline a further 5% while houses values will only experience a 0.74% decline.
Strategy implication 01 – Input Concern
What is very important here is that information retrieved (screenshot 5) will impact the amount of money I have to outlay to invest in Camden Council properties. For example, the fact that rents will decline at a higher rate than prices means that I will have to have a higher deposit to minimise the reduced capacity of the rental income to maintain the property, that is, cover the expenses of keeping the property such as mortgage fees, vacancy rates, council and utility fees. If the option of having a bigger initial contribution is not available, than I would have to consider whether my existing earnings (i.e. my salary) can cover additional costs of running the property without having an adverse effect on my lifestyle. In simple terms, for example, considering that rents will decline from $520 per week to $494 per week in 2022, can I cover, from my pocket, the reduced $26 weekly (which works out to be $1,352 per annum) and still meet all my other financial obligations?
The answer to this question will vary based on the individual’s financial circumstance. The answer also needs to be ventured alongside additional strategic considerations:
- Is the YoY and/ projected capital growth of the area rising or declining? If the growth rate of an area is rising, this means that the loss of declining rents, that is, the loss from having to go into one’s own pocket to maintain the property, will be offset by the imminent capital gain. This means that ‘total return’ of the investment (the return from rent plus the return from capital gain) will be in positive territory as such constituting a reasonable investment. On the other hand, should the growth rate of an area be in a decline, the loss on rents will be compounded by the loss in the value of the property meaning that the investor will have to wait much longer to realise a gain on that investment? For the simplicity of the example, let’s say that after knowing all of the expenses required to maintain a property, we come to the conclusion that the rental income of $520 per week makes the average property in Camden Council a neutrally geared one . This means that the projected loss of $26 per week equals to 0.17% annual loss ($26 x 52 weeks / 819K median property value) making the total return -0.91% in 2022 (0.17% loss in rent plus 0.74% loos in property value).
- As a result of point one, the investor will have to consider whether loss on rent and/or compounded loss from reduced property values is acceptable and whether there are other areas which are of a higher investment quality considering the individual’s current financial situation and investment needs. This is what is sometimes referred to as ‘opportunity cost’ which essentially means – can I get more out of my investments by investing in other areas? This is where we suggest bench-marking Camden Council with other areas by using the available HtAG filters referred to in previous pages.
However, regardless of our investment capacity, investment appetite and our risk profile, how do we know how long an area will ‘spend’ declining or rising? Knowing this information can influence whether we invest in a particular area or not irrespective of whether the current snapshot of the area highlights a positive total return (imminent capital growth with reduced or no rental decline or capital growth combined with rent growth).
For example, what if an area presents a suitable investment based on the total return and the fact that its growth rate is in the rising part of the growth rate cycle but, however, is projected to slow down or even decline in the coming year(s)? This would mean that the imminent return made will be eaten away by the cooling off of the particular market characterised by the decline which is ‘around the corner’.
Strategy implication 02 – Output Concern
The implications and importance of wanting to understand how long an area will ‘spend’ at a particular section of the growth rate cycle largely depends on what we at HtAG call ‘output concerns’. Essentially, the output concerns are related to the ‘use’ of the investment, that is, what one plans to do with the investment and thus achieve by investing in a particular area. For example, if the investor is buying in a particular area to renovate and ‘flip’ the property, that is, sell upon renovation, the amount of time an area will ‘spend’ at the particular ‘quadrant’ of the growth rate cycle becomes highly pertinent. As such, even though at the current time of buying a property an area could have a desired total return, the forecasted growth rate could signal that the area will plateau or maybe even further decline in the coming year thus having a negative effect on the investors potential to realise the desired return once he/she ‘flips’ (i.e. sells) the property.
For the sake of simplicity, let’s use the Camden Council example to illustrate what is being said. If I imagine that my strategy is ‘flipping’, that is, buy, renovate and sell, I would want to know how the area in question will behave in the time it takes me to buy the property, renovate it and sell. Essentially, I would want to determine whether Camden Council will be increasing in value while the renovation is taking place so that in addition to adding value to the property through renovation, I can also take advantage of the market movements and compound my returns with the capital growth.
Taking Camden Council as a proxy, screenshot 5 highlights that Camden Council market is experiencing a decline. Its YoY growth change has been -0.84% while the projected (2022) capital growth rate will be sitting at about -0.74%. Just by looking at this table alone, I can say that Camden has plateaued or will reached the bottom of the negative growth rate cycle in or about 2020 since its negative growth rate has ‘slowed down’ or reduced when comparing figures between Q2 2020 (-0.84%) and Q2 2022 (-0.75%). At high level, this means that buying a property in Camden now or around 2021 will ensure that while the property is being renovated (or developed), the Camden Council median price will be at the onset of a new positive growth (rate) cycle which makes it a good investment area for investors who ‘flip’ and/or develop properties. The fact that an area has bottomed is more or less of value to any other type of an investment strategy since imminent capital growth can serve to compliment and balance a cash flow geared portfolio as much as it can a capital growth geared portfolio.
Please note that the same analogy can be applied to other areas should the capital growth of Camden Council experienced from 2020 to 2022 not be suitable for a particular investor.
Some other output concerns (i.e. uses of the investment) to be considered—among many other—prior to making a decision to invest in a particular area based on the statistics returned at first level search are as follows:
- Will the property bought in Camden Council (or any other Council) be developed? As developments have an approximately 2-year lag from conception to realisation, the projected rate of growth change becomes very pertinent for those who develop properties;
- Will the investment property form part of a cash flow geared portfolio that needs to be balanced? In this instance, projected capital growth becomes important which means that investors should look for areas that are at the bottom of their growth rate cycle of near the bottom to maximise the return of the imminent growth and the onset of a new cycle;
- Will the investment property form part of capital growth geared portfolio that needs to be balanced? In this instance, the projected change in rents are pertinent as investors would like to see an increase in rents so that the cash flow potential of the area and the property invested in within the area balances the existing portfolio focused on capital growth;
- What is the preferred or required time frame for holding the property in a particular locality? As stated previously, short term investments (i.e less than one cycle of approx. 8 years of holding the property) should take advantage of the existing and projected market conditions to best ‘time’ the investment and take advantage of the market movements. If it is a long-term investment, investors should focus on the total return (yield plus capital growth) which suits their current and future financial circumstance and investment needs (i.e. demands of their portfolio). Aspects such as the forecast confidence, current and projected yield and current and projected capital growth should be taken into consideration to make the most appropriate decision based on individual circumstance. Furthermore, and more importantly, understanding the historical ‘behaviour’ of the market in terms of the projections provided should assist every investor in determining the long-term investment quality of an area. However, this can be ascertained only if the search drills down further unearthing the second level of statistics (this will be addressed in the following pages);
- What is the most suitable suburb to invest in within a particular Council? The Australian property market is not monolith but subsumes many different submarkets that ‘behave’ in different ways and move at different pace. The same analogy however can be applied to its submarkets irrespective of size. This means that knowing the movements of a Council area is beneficial to ascertain whether a particular Council locality fits our broad investment needs, however, stopping at this level of analysis might mean that we miss out on taking advantage of the movements of its submarkets, that is, variance in the suburb statistics. This can be ascertained at the second search level which will be discussed in the following pages.
- Other (driven by idiosyncrasy of individual circumstance).
Overall, there is a lot that needs to be considered from a simple one-row table containing statistics of the Camden Council (screenshot 5) property market. In summary, before moving on, investors should have clarity on the following (please note this is not an exhaustive list and will vary based on individual circumstance):
- What is my investment strategy? Am I interested in cashflow or capital growth or both?
- How much money am I prepared to spend and what is my price entry ceiling?
- Can I maintain the acquired investment when I take into the account my financial circumstance and the returned cashflow of the property (i.e. yield)?
- Am I looking to renovate and flip the property?
- Am I looking to develop property?
- Am I looking to balance my existing portfolio or begin my investment journey?
To be continued in Part 2…
 Please note that at times of writing this blog, for a neutrally geared portfolio one would have to find properties with a gross yield of approximately 10% (https://www.yourinvestmentpropertymag.com.au/buying-property/equity-is-what-makes-properties-positively-geared-82545.aspx).