By Eynas Brodie and
Michaela Ryan

Capital growth is a great thing for investors, which probably goes without saying. It provides increased equity for future investments. Or it can simply provide a profit which can be cashed in at any time.

As Monique Wakelin, of Wakelin Property Advisory, points out, "Capital growth enables you to accumulate substantial net equity and to build on it relatively quickly."

She continues, "While it makes sense to aim for a reasonable balance between growth and income to allow you to meet your loan repayments, insurances and other holding costs, your bias should always be in favour of growth because this is the most direct route to financial independence."

In this article we outline some opinions and formulas used by experts from various parts of the property industry to find capital growth 'hot spots'. And we ask them for examples of suburbs which currently have potential written all over them.

One thing to keep in mind is that capital gains don't often come overnight. In the past few years there were plenty of stories of phenomenal short-term gains, but it's only for a few years in each property cycle that this is the norm.

Short-term gains can still be made at the moment, and some of the strategies outlined below may point to these sorts of areas. However, for the majority of investors, and for those who prefer lower-risk investing, it's about looking for an area with the right fundamentals for capital growth. And then it's just a matter of time.

Scott McGeever, director of Property Searchers, recommends to his clients that they need to own a property for 10-plus years in order to maximise their capital gain. "We advise all our clients you really need to be holding a property for a minimum of five years," he says.

Of course, how long you need to hold on to a property to realise a sizeable gain will always come down to the area you invest in. On top of that, you have to make sure you've chosen the right property within that area. This article focuses on finding areas with capital growth potential, but you also need to do research on the ground to find out which parts of a particular suburb, and which types of properties, are more likely to offer strong growth.

The demographer says: KPMG partner and demographer Bernard Salt believes there are two main demographic factors currently affecting capital growth: infrastructure and job growth.

Infrastructure:
"Places that have recently been subjected to infrastructure changes will change the value of a suburb," Salt says. He cites the example of Mandurah, south of Perth, where a new railway is under construction, to be completed by the end of next year. "It also has a freeway bypass that will be completed by 2009. That will bring Mandurah closer to Perth and make it far more attractive."

Property values in the Mandurah area have already increased significantly in recent years, with 15.8 per cent annual growth between 1999 and 2004, according to REIWA. However, Salt says there are always two phases to price growth associated with infrastructure changes. There is an initial boost when construction begins, and then another boost when the project is completed.

"Once it's actually completed and people can actually see and feel it ... that is when the mass market makes its move. And that's when I think the most significant gains are made.

"A good example of that is when the extension of the motorway south of Tweed Heads to Byron Bay was completed soon after the turn of the century. That motorway had been under construction for many years, but it wasn't until the motorway was actually completed that property values changed quite substantially." (Salt also concedes that the completion of this particular project coincided with "the last property boom").

Salt cites other infrastructure projects which are currently underway which he believes will positively impact on capital growth in surrounding areas. He believes the completion of the western bypass around Geelong will have a bearing on the value of property along the Surf Coast (for example in Anglesea, Torquay and Aireys Inlet).

He also notes that the completion of the Western Orbital around Sydney will impact industrial property values, and perhaps this will flow on to residential properties.

Salt recalls that when the Western Ring Road was completed in Melbourne, industrial premises located in inner suburbs were attracted to new premises along the Ring Road. That freed up land in inner suburbs such as Northcote and Brunswick for gentrification.

"By that logic you would also expect, with the completion of the Western Orbital in Sydney, for there to be significant gains in, say, places like Auburn, Marrickville, Burwood and perhaps Ashfield - (those) inner-west (areas) which have traditionally contained large numbers of manufacturing establishments ... which would then be sucked out to the Western Orbital. And that then leaves formerly industrial suburbs to gentrify as a consequence."

Salt also refers to the proposed north-south bypass tunnel in Brisbane which could affect traffic in South Brisbane, West End and Woolloongabba - making these areas more attractive.

Job growth

The second factor Salt mentions is job growth. "I think you can't be definitive about this. But my interpretation is that the sequence goes like this: job growth begets population growth which begets property value growth."

He believes that the time between job growth and population growth is around two years. And the time between population growth and property price growth is usually an additional year. "A good example of that is the way in which population levels in Western Australia at the moment are growing quite strongly on the back of a resources boom that kicked off there two years ago."

Salt explains that an increase in jobs will attract new people to an area (in the WA example, largely interstate migrants), which will increase competition for properties, which pushes up prices. In addition, low unemployment leads to a high level of confidence, which also helps property values.

Social change

Salt says that social change can also affect the capital growth of properties in a suburb. For example, in the late 1990s there was the influx of singles and couples, including DINKS (double-income-no-kids) and the pink demographic, to inner-city areas such as South Sydney, the City of Port Phillip (in Melbourne) and Brisbane's New Farm. However, he believes that there is no such social change taking place at the moment, and that it's is too late for investors to take advantage of this recent phenomenon.

However, Salt says we could expect to see another big social change in about five years time, although it's not possible to predict what form it will take.

The property analysts say: John Edwards, chief executive of Residex, explains that the way you locate a high-growth area will depend on the stage of the property cycle.

"At this point in time, what you should be doing is looking for those areas that have reached the bottom of their correction cycle," he says. This is a two-step process. First, he suggests you identify, mathematically, that an area should be good, in capital growth terms.

Step two requires you to consider the area subjectively - asking whether it has a "raison d'etre" (or a reason for existing), such as a sound economy and job growth potential.

Edwards talks us through an example of a suburb in Melbourne which should perform well in coming years, and explains why. "Looking at Mt Waverley in Victoria, houses for example, in the last 10 years the average rate of growth has been around 9.4 per cent. If we then look at the pattern we've had in the last three years, we've gone: three years ago, 14.29 per cent; two years ago, 14.1 per cent; and then we went into negative 9.81 per cent (last year).

"In recent times, it's turned positive - in the last few months or so. And so you would have to say Mt Waverley is past the bottom of the cycle.

"Given that it's starting to trend up, and the fact that it's actually been in loss of 9.8 (per cent), you'll have all of those (vendors) in that market who really don't know what's going on ... and (have) had their houses overly priced for a little while, being quite nervous and quite unsophisticated sellers. So for the person who really knows what they're doing, in that sort of market they could really go in and negotiate a bargain."

Edwards points out that the average long-term rate of growth for this area is 9.4 per cent, which is higher than the normal long-term average in most major capital cities, which is around 8 per cent. "So there's another key that tells you that this area does better."

Based on similar reasoning, Edwards gives the following examples of postcode areas which should perform well in other States:
Brisbane: West End (4101); Sydney: Epping (2121); Perth: Cottesloe (6011) (NB: these predictions are for the house market, not the unit market).

Property analyst Michael Matusik, of Matusik Property Insights, suggests that the same factors always tend to be responsible for strong price growth in any particular suburb.

On this basis he has come up with his own formula for predicting which suburbs are likely to experience strong capital growth in the future. There are separate formulas for detached houses and for units.

Detached houses:

1. Above average price growth. Examine price growth in the suburb by looking exclusively at resales (take out any data relating to the sale of a new development, for example). And on this basis, look for suburbs which have experienced price growth greater than the average for the city / region over the past 12 months.
Possible sources: RP Data, Residex.

2. Above average sales. Matusik suggests a suburb should display a turnover of properties which is higher than the average for the region / city. He says there should also be more than 200 sales of detached houses within the postcode per year.
Possible sources: Real Estate Institute in your State, APM, Residex.

3. Above average rental yield. The suburb's gross rental yield should be higher than the average for the region / city.
Possible sources: Price data and rental data from Real Estate Institutes, APM, Residex or local agents.

4. Positive population growth. Check that the population growth for the area is a positive figure.
Possible source: Australian Bureau of Statistics, planning authorities in your State.

5. Low unemployment. Unemployment in the area should be lower than the State average.
Possible source: ABS, local councils.

6. Number of rental households. The proportion of households which are rented in the area should be greater than 25 per cent.
Possible source: ABS.

7. Handy index

The property should score at least six out of ten according to the "handy index". Work out your score by considering:

Want more experts, more opinions? Click here for Page 2 ...

Units:The formula Matusik applies to units is the same as the formula we just outlined for houses. There are only two differences: First, when considering sales volumes (item 2), you only need to make sure more than 50 total apartment sales take place within the postcode per year.

And second, when working out your "handy index" score (item 7), look for a unit which scores at least five out of ten.

At the website www.matusik.com.au you can download a copy of Matusik's guide to picking your own hot spot.

Tim Lawless, national research director with PRDnationwide Research, lists a number of issues which are taken into account when his organisation comes up with hot spot predictions.

For starters, infrastructure plans need to be considered. Lawless agrees with Salt: "Government spending in an area will typically improve values in the area - so long as the impact is a positive one. The best example would be the completion of the M1 Motorway connecting Brisbane to the Gold Coast, which saw property prices along the northern Gold Coast jump almost overnight (on completion of the project).

"As another (current) example - the planned 'Green Bridge' that will create a bus and pedestrian link between Brisbane's inner-southern suburbs and the University of Queensland should also impact positively on the local market, as it will open up the area to strong rental demand."

Lawless says the bridge should impact positively on Yeronga, Dutton Park, Fairfield and Highgate Hill. "Social and retail infrastructure upgrades such as Brisbane City Council's SCIP (Suburban Centre Improvement Projects) have also made positive impacts on the values of property. A SCIP typically involves investment by both the council and local business owners, with the aim of lifting the area's visual appeal, revitalising the retail amenity and improving the overall identity of the area. Budget allocations have been made for SCIPs at Indooroopilly, Zillmere, and two other locations within the Brisbane area.

"Involvement by the Urban Renewal Task Force has also been a good indicator of positive property growth. The task force has been involved with upgrading inner-urban areas such as Fortitude Valley, New Farm, Newstead and Bulimba - all of which have been stand out property markets. The Task Force is next focusing on West End."

Lawless also explains how the 'ripple effect' can affect property prices. "Where a particular suburb has experienced a very strong property market, often the neighbouring suburb will become undervalued in comparison. It is important to investigate whether the market fundamentals are similar also, in terms of demographics, location attributes, access, etc. Picking the 'next best thing' often means following the ripple of demand and price movements.

"A good example is the suburb of Lota on Brisbane's southern bayside. The suburb sat dormant for years until the popularity of bayside living became apparent. As suburbs such as Wynnum and Manly, which are located further to the north, became out of reach for most buyers, prices at Lota started to boil."

He points out that access to the CBD is an increasingly important factor. "With commuting times in many capital cities blowing out, areas located adjacent to efficient transport infrastructure are placed to do well. A good location is one that is not too close and not too far - properties sitting located next to the train line or freeway may not perform very well at all."

Next is an oldie but a goodie - the concept of 'scarcity'. "Areas that offer a degree of scarcity as well as healthy demand are often standout performing areas. Scarcity can be attributed to location factors such as water frontage, elevation, proximity to the city, or a parkland setting - to name a few examples."

Lawless also recommends speaking to as many experts as you can about any suburb you are interested in. "These experts may include valuers, town planners and marketing and sales agents familiar with the areas. Obtaining a wide and varied assortment of opinions is very important - the more brains involved, the less likely it is you have missed some important piece of information."

For example, Lawless says an area might look like it's reasonably priced, but discussions with a town planner or the council may reveal that it's located in an area prone to flooding. Finally, he says it's important to consider future town planning issues.

"With changes in town planning, areas and individual property values can be impacted. A good example is the recent South East Queensland Regional Plan, which specifies higher densities within areas along transport corridors and inner-city regions.

"Properties that were once zoned low-density residential may be changed to reflect a higher density zoning."

Lawless says that such rezoned areas can often go up in value.

The buyers agents say: Monique Wakelin has a simple list of 'Dos and Don'ts' to see buyers succeed in any market situation, whether prices are soaring or plummeting.

"If you're borrowing money to buy property, you really have to go for capital growth," she says. "This is the only way you can justify borrowing money. To do that you need to stick to major capital cities and within those capital cities, you need to be investing in the inner suburbs."

For Sydney and Melbourne, Wakelin's rule of thumb is between 2 and 12 km, while in smaller capitals she suggests between 1 and 2, or 5 and 6 km. Although Wakelin advises investors to look at locations which are close to amenities, she also recommends "quiet side streets".

In Melbourne, where Wakelin is based, suburbs she believes still have room for growth include Kensington, Flemington, Brunswick and Elwood. In the more classic, blue-chip areas, Wakelin says Kew, Hawthorn and Armadale also present opportunities for capital gains.

"A well-selected asset should achieve ongoing capital growth of 6 to 8 per cent ahead of inflation on an average annual basis over the holding period," she says.

"This means a quality investment should double in value every seven to ten years. This level of growth will underpin the consistency and long-term viability of the rental income."

Ask McGeever how to identify a profitable property investment and he will tell you that a suburb's track record is one of the most reliable yardsticks of how it will do in the future. He believes that growth statistics for the past 10 years are a vital piece of information about an area - and much more telling than the growth statistics for the last three or four years.

He also says that many older suburbs, as opposed to new subdivisions and recently constructed residential communities, tend to present sound investments for the buyer chasing a profit.

McGeever points to scarcity of land and built-up areas as being good indications of an area where value is assured, due to the limited potential for further development.

Based in Brisbane, McGeever says properties with a sound history of growth such as Bulimba, Hawthorne, New Farm, Teneriffe, Windsor and Wilston are among the suburbs more likely to experience capital growth in the short term. Areas with good prospects for future long-term capital growth are properties less than 15 years old with good proximity to either Ipswich or Caboolture, he believes.

In Adelaide, Chris Waterman of Waterman & Waterman is trying a new technique to identify areas which are positioned to achieve above average capital growth going forward. He admits the exercise is still in the trial phase, but the results produced so far have given him some interesting insights.

Waterman chooses a property type - for example, a three-bedroom townhouse - and researches the list price, sale price and rental yield that type of property is achieving in up to five different (but similar) suburbs. The comparison takes into account the characteristics of the suburb, the physical features of the property and improvements to the land.

"I'm looking to find if one appears to be undervalued," he explains.

So far, Waterman's initial comparisons indicate that the more affordable end of Adelaide's inner-city market could be set to experience solid long-term capital gains.

The developers say: Melbourne-based developer Michael Yardney is always on the lookout for sites in areas with growth potential. He says there are four elements buyers should consider when chasing capital growth.

First, buyers need to identify and understand which stage the property cycle is at. He believes astute buyers will recognise the value of a flat market and the buying opportunities it presents.

Second, it's important to choose the right suburb. He says there are still areas in most of Australia's major cities which are "outperforming" and have good capital growth. He suggests contacting research organisations such as Residex, RP Data and real estate institutes which can provide data about suburbs with consistent capital growth and which are expected to continue growing.

"Residex, for example, has selected suburbs in Melbourne and Sydney in particular which they believe are going to have 10 to 12 per cent capital growth or more, and that's because they are areas with high demand but a shortage of supply," Yardney says.

Another approach is to locate suburbs in transition, Yardney says. "There are some areas going through gentrification as the old houses are being pulled down and new ones are being put up. If you buy in those areas, you're going to have the benefit that others are improving the suburb for you."

For example, Yardney says old Housing Commission suburbs are among those doing very well.

Third, negotiate and take advantage of opportunities that arise because of motivated vendors. "Having found a high-growth suburb, you have got to find a motivated vendor and today, there are a lot of those," Yardney says.

In Melbourne, where Yardney is based, he believes the suburbs set to outperform the market "in the next year or two" will include Elwood, St Kilda, Balaclava, East Brighton, Hampton East, Bentleigh, Caulfield and Elsternwick.

"These are all southeastern suburbs near the beach, where there is a higher demand from owner-occupiers and investors than there are properties for sale," he says.

A city by city breakdown follows on page 3 ... click here.

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Perth-based developer and architect Ron Forlee says, "Areas that have long-term potential growth are suburbs between Rockingham and Mandurah and these include Rockingham, Waikiki, Warnbro, Port Kennedy, Secret Harbour, Golden Bay, Singleton, Madora and San Remo.

"The reasons for these suburbs being sought after are that they filled in the growth area between Rockingham and Mandurah and are predicted to be the fastest growing areas, supplemented by the continuation of the freeway south and the building of the railway line from Mandurah to Perth. In addition, there is a perception that this is the cheapest coastal land comparatively with the rest of Australia and will generate a continuing demand.

"Areas surrounding Mandurah will also experience a continuing growth for similar reasons so one can look at Lakelands, Stakehill, Nambeelup, Barragup and Ravenswood.

"Other areas that one would look at are those suburbs inside the 10 km radius that have room for expansion with higher density and development potential and are still seen as being undervalued such as Innaloo, Westminster, Mirrabooka, Morley, Embleton, Ashfield, Belmont, Cloverdale, Carlisle and Bentley."

Brisbane

According to HTW, residential properties within walking distance to new developments in Brisbane could be in for some good times. Residential Review, a research product available on CD-ROM, says properties on the eastern side of Hamilton stand to benefit from the Portside Wharf development which, when completed, will include fresh produce markets, cinemas, a gymnasium and numerous cafes and restaurants.

River Park, a riverfront development at Newstead, is another project set to positively influence real estate in surrounding suburbs such as Bowen Hills. "This development will offer prestige residential apartments together with areas of retail / commercial," HTW says.

HTW believes a large neighbourhood shopping centre being built in Newmarket will boost local property prices, the same way urban renewal will revitalise Albion.

"There are currently a number of redevelopment projects planned for the Albion area which should gentrify and enhance this suburb," HTW says. "Much of the previous industrial areas are being redeveloped for mix-used developments.

"Properties, particularly houses, in bayside suburbs such as Wynnum, Manly, Sandgate and Shorncliffe are generally expected to remain popular with purchasers into the future."

Perth

HTW's research shows there are more than 40 suburbs in Perth (such as Balga, Thornlie, Forrestfield and Marangaroo) that have a growing number of properties in the $200,000 price range. "Anyone considering buying a home in the $200,000 to $250,000 price range should expect these properties and locations to show appreciation over a five-year time frame," HTW says.

"Houses in good locations such as Scarborough, Wembley Downs, Booragoon and Kensington, having easy access to the CBD and northern beaches, can be purchased in the $400,000 to $500,000 price range and are expected to show good capital appreciation."

Sydney

According to the Residential Review, suburbs within 5 km of the city are likely to retain their attractiveness in the market's eyes.

"The inner-west suburb of Marrickville appears the next logical area to improve, given the historic movement further west from the inner ring," it says. "It has a house median price of $523,500, which in Sydney terms is a relatively affordable entry level.

"Towards the northwest, Ryde may represent good value for money. Ryde is located on the western end of the North Shore, with a house median price of $585,750. It is relatively undervalued given the price levels of the surrounding suburbs of North Ryde ($625,000) and Marsfield ($650,000). Macquarie University is nearby and the suburb has an established road network incorporating the M2 Motorway and Epping Road Expressway.

"To the northern beaches, there may be good opportunities in standard residential located in Frenchs Forest. There is a dominance of 1960s housing which could have good potential for renovation and profit. Frenchs Forest has good road infrastructure leading to and from the city, and is close to the beach.

"The inner-ring suburb of Redfern appears to have potential upside, especially on the standard residential side, with the median price of houses currently standing at $624,000.

"The changing demographics and future proposed large-scale development to gentrify the neighbourhood should bode well for the suburb. Its close proximity to the Sydney CBD and established train, bus and road infrastructure makes it attractive to young professionals working in the city," the Residential Review says.

Canberra

In line with the fundamentals of property investment, HTW believes suburbs within 5 km of the city will continue to appeal to buyers. "The inner-north district represents good value for money for standard residential property given a median price of $427,000 for the March 2005 quarter, relative to the inner south with a median price of $595,000 for the same period," it says.

"Housing is predominantly older style and has good potential for renovation. Additionally, the ACT Government appears committed to the revitalisation of the city centre, which should in the medium term enhance the district's prospects for future capital growth.

"Further away from the CBD, older suburbs developed in the early 1970s around Woden and Belconnen town centres provide relatively affordable entry-level accommodation with a choice of dwellings on small to large allotments."

Darwin

Again, suburbs within 5 km of the CBD, such as Larrakeyah, Fannie Bay, Parap, Ludmilla, Stuart Park and The Gardens, have a positive outlook, says HTW. "Northern suburbs such as Wulagi, Wanguri, Jingili, Alawa, Tiwi, and Nakara have shown good value growth over the past three years," it says.

"They are close to the university, Casuarina shopping precinct and hospital precinct which provide many tenants. Many home owners continue to renovate and ex-Government dwellings are being sold onto the market, thereby working to lift the amenity and profile of some of these suburbs. The new 650-lot subdivision on Lee Point Road may also boost activity in the northern suburbs over the next two years."

Based on HTW's findings, houses in marina-based precincts such as Cullen Bay and Bayview are generally expected to remain popular with purchasers, and properties with views to the water or marina frontage are likely to perform well.

Melbourne

HTW research was not available for Melbourne, Adelaide and Hobart. However, Charter Keck Cramer's strategic research director Robert Papaleo believes suburbs with "locational characteristics" are likely to outperform the average in Melbourne because their underlying fundamental values haven't been fully realised in current prices.

He defines locational characteristics as proximity and accessibility to the CBD or proximity to major investments by the Government or public sectors in infrastructure, such as roads or employment-generating facilities.

"Transit cities", such as Sunshine, Box Hill, Frankston and Footscray are examples, he says. Suburbs with strong capital gains already achieved over the past two to three years and that are adjacent to other high performing suburbs also have better prospects of outperforming. Papaleo names Vermont, Heidelberg and Fawkner as potential candidates.

Adelaide

Unlike the markets of other capital cities, such as Sydney or Melbourne, the presence of speculative investors is not strongly felt in Adelaide where the majority of buyers are owner-occupiers, according to Bill Waterhouse, director of Fudali Waterhouse (valuers). Regardless, the principles for achieving above average capital growth are the same and location has to be at the top of any buyer's checklist. Undiscovered or underdeveloped suburbs can be a good starting point, Waterhouse says, particularly if they are close to, and share the amenities of, more affluent areas.

"Those little areas have much more room for growth because they will catch up in time with their neighbours in terms of growth and prestige," Waterhouse states. "(This applies to) inner-city areas that are perhaps not the flavour of the month at the moment but will become so with first or second homebuyers."

Waterhouse lists the inner-eastern areas of Evandale, St Morris and Firle. And elsewhere in Adelaide he mentions Frewville, Fullarton, Clarence Park, Black Forrest and Clarence Gardens. "In time, the effect of being close to the city and being close to the popular suburbs will carry them through," he says.

Hobart

Russell Cripps, a Hobart valuer with Saunders & Pitt, suggests there will be little, if any, "above average" growth in Hobart's real estate market in the foreseeable future. He says it will be a case of "steady as she goes" for the wider market, with some minor corrections expected to occur. Suburbs within a 2 km radius of the CBD are still "strongish", he says, namely West Hobart, North Hobart, South Hobart, Sandy Bay and Battery Point.

This article was originally published in Australian Property Investor Magazine and is copyright and produced with their permission.

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