How to spend $1m: Near-CBD vs the outer suburbs
A fundamental principle of property economics states that the further you are from a major CBD the cheaper property becomes. As such, affordability-driven investors feel they can get into a market like Sydney if they compromise on location.
But how wise is this approach?
While I understand why someone with limited funds might choose to buy a larger holding in fringe suburbs, there is another universal truth supported by historical evidence: The overall return on investment is best in near-city suburbs.
And this is especially poignant now. As we progress through the COVID-19 crisis, finding opportunities with excellent fundamentals for long-term growth is essential.
Here’s why investors should avoid compromising on location in Sydney’s market, and the factors which allow for more affordable real estate in prime positions.
Drawing the line
I define inner-city suburbs as any within a 10-kilometre radius of the central CBD. Commuting to the heart of town within this circle is simple. In fact, those with motivation and decent gym shoes could run to Circular Quay while barely raising a sweat.
To break it down further, prime inner-city suburbs include the Inner Eastern addresses such as Bondi, Bronte, Coogee and Woollahra, Inner West locations such as Balmain, Lilyfield, Newtown, Annandale and Leichhardt, or Lower North Shore areas such as Cremorne, Mosman Neutral Bay or even Manly on the Lower Northern Beaches.
While property in these locations is relatively pricey, ignoring these suburbs and investing on the fringe of Sydney discounts yet another real estate fundamental – location cannot be changed.
No matter how well you purchase in the outer suburbs, you can never amend your position to be closer to the city.
Why inner-city matters
One big driver of property price growth is scarcity. With limited real estate in the inner city together with ever increasing demand, values rise. Sydney is the perfect example. Our population keeps growing, while land continues to be in short supply. It’s a recipe for long-term capital gains.
For example, from 2011 to early 2020, Manly saw its house price increase by 83 per cent according to realestate.com.au. The same measure for other suburbs included Balmain 71 per cent, Woollahra 47 per cent, Lilyfield 64 per cent and Mosman 54 per cent.
Best of all, while this growth is impressive, well located suburbs are also resistant to price falls in times of downturn. Something to bear in mind during this Coronavirus pandemic. In fact, they’re frequently the first areas to experience price increases in a downturn because there’s often a ‘flight to quality’ that sees capital shift away from secondary assets towards blue-chip options.
Sydney offers those seeking quality investments a range of unique drivers too. For a start, we are the financial centre of the nation, so employment and industry investment remains consistently strong and drives population growth which creates the demand for real estate.
We also have a unique geographic drawcard in Sydney Harbour. Ready access to the harbour as well as stunning water views all add to the city’s real estate appeal and help position us as a truly global metropolis.
Quality inner-Sydney property has all the ingredients to ensure sustained long-term value gains.
Where to compromise
I believe smart investors must choose location over all other factors – so where should they compromise if price is an issue?
Firstly, consider your budget and start looking at what property types falls within that figure in and around your desired suburbs.
Obviously not everyone can afford to purchase a waterfront home in Vaucluse with direct harbour access and views to Bennelong Point. But dig a little deeper and you might unearth an older, modest one-bedroom apartment within similar proximity that falls within your budget.
Another compromise is condition. Finding a property that’s a renovation opportunity will help you purchase below the suburb median. Best of all, you can add quick equity through a bit of handiwork if you are that way inclined.
Again, perhaps the outlook isn’t as good as a waterfront and it might be a longer walk to the shoreline, but being positioned inner city will assure you of two things:
1 – Tenant demand will remain strong
2 – Long term, rising values will outstrip those of outer suburban property.
In truth, there’s never a bad time to invest in quality real estate close to Sydney’s CBD. With price resilience, historically impressive capital growth and high tenant demand, the downside risks are mitigated for long-term purchasers.
While the fringe markets are susceptible to huge value swings through the price cycle, inner city stock remains stable. In short, don’t track the cycle, just buy in these blue-chip locations when it suits you and sit tight. The rewards will come.