Fringe Benefits

Much discussed but seldom clarified, the fringe is a surprisingly difficult thing to define.

We’ve gone by the Real Estate Institute of Australia’s (REIA) understanding, which centres on the outer ring LGAs (Local Government Area) of each state capital, and our top 10 suburb lists have been assembled by cross-referencing this information with RP Data’s 12 month growth for July.

While it’s not possible to make sweeping generalisation on the overall performance of fringe properties, with expert help we have been able to find an amount of common ground and draw some useful conclusions about the fringe and all its benefits.

The affordability factor
While it may not always be a factor (the average house in Collaroy costs $1,365,000, according to RP Data), the relative affordability of the fringe undeniably plays a part in its appeal, with cash-strapped buyers finding they can usually get much more for their money in the city’s outer suburbs.

“The further you get away from the CBD typically the more affordable the suburb’s going to be,” says Tim Lawless, director of property research, RP Data. “It’s just a natural progression. People are looking to those outer areas to get their slice of the pie and generally your fringe areas are going to be quite affordable; they appeal to first home buyers, young families and quite often they also appeal to investors.”

All about the infrastructure
Not every affordable fringe suburb will have the same perks of course, and this is something that buyers should consider carefully before parting with their cash.

Solid infrastructure is key to an area’s success, and poor transport connections could spell disaster for an investment, particularly when tenants need to commute into the CBD.

“Really strong arterial road access, public transport and amenity” are all important, says Lawless, who also stresses the need for schools, shopping centres and hospitals, as well as social amenities such as cafes and restaurants.

Graham Joyce, president – REIA agrees, saying that new roads and public transport links bring the outer suburbs closer to the city. “Some of the fringe suburbs don’t provide those amenities and the infrastructure,” he adds. “That would be your downfall as opposed to inner city or near cities which will have all of that.”

Angie Zigomanis, senior analyst – residential property, BIS Shrapnel, underlines the importance of all of these factors from an investor’s point of view with the bottom line: you’re more likely to find tenants in the fringe if solid infrastructure is in place. He warns that investors also need to ensure that their property compares favourably against the local competition.

“Ultimately, if there’s an excess supply of rental properties in any area, people are really going to favour the one that’s got all the location benefits. If you’re looking for rental growth and tenant demand you need to be looking at those areas that have a critical mass that makes them more attractive to people who want to live there.”

Lawless also advises investors to be wary of outer areas which are still developing, saying that large, master-planned estates may sometimes be lacking when it comes to the basics: sometimes, he says “you need to wait for that area to reach a critical mass for all those amenities to be in place”.

Satellite success
Joyce references satellite cities, such as Joondalup outside Perth, as another example of what works well in the fringe.

“A lot of people that live in that area don’t need to come to the CBD because Joondalup has got just about everything in it that the CBD has got. These satellite cities play a role in the outer suburbs.”

In fact, successful satellite cities are able to function entirely independently of the CBD. “They’re increasingly starting to build up stronger amenity, like really good shopping centres,” says Lawless. “Some of the Westfields that are servicing the outer areas are really good. As a result, residents don’t ever have to leave their local area – a true fringe benefit indeed.

Investor appeal
The ultimate draw for investors is, as Lawless points out, that the fringe areas are often the home of the best rental yields. And a decent purchase price, when coupled with a strong rental rate, equals “high demand for rental accommodation in outer areas”.

Not surprisingly, the in-demand areas within close proximity of large working nodes and industrial centres tend to have “quite a high demand for rent,” according to Lawless. Consequently an investor who’s able to buy cheaply in such an area will typically get a “fairly decent” rental yield.

Zigomanis agrees, adding that “because it doesn’t tend to get the same capital growth that you get in the inner areas you tend to find that you get a better rental return.”

Beware the newbies
Zigomanis warns that investors buying old stock within close proximity of a new development may find themselves losing out however. “The issue you always have there in terms of capital growth is you’re always competing against the next brand new place not too far away.

“Areas that are closest to new housing suburbs you’ll tend to find that you probably won’t get the price growth because you’ve always got people who’ll have the new house option and as long as the developer can build it cheaply enough people will always prefer that one.”

Of course, canny investors can turn this around and splash out on a brand new investment property. “Then you could always claim building depreciation”, Zigomanis explains. “So you’ve got other deductibility over and above your normal interest repayments.”

Hot spot, or not?
Joyce urges investors not to be too easily seduced by the latest hotspot suburbs, warning that they may slip out of fashion as easily as they came in. “It might be the next hot suburb this year but it won’t be the next,” he says. “If we’re buying a property in the suburbs if we take a medium view on wherever we invest you’ll probably find it does as well as the suburb next door.

“If you took it over a 7-8 year span you’ll find that most of the suburbs are pretty close. There are peaks and troughs and different times depending on what’s happening.”

As an alternative, Joyce advises investors to rely on the old faithful: strong government infrastructure and amenities as “in the medium to long term they all do pretty well”.

What’s next for the fringe?
Joyce predicts only good things for the fringe, saying he thinks it will “evolve and continue to grow quite strongly – population projections are very strong for the country after all” – and all these people have to be housed somewhere.

As the outer suburbs continue to grow out the fringe goes along with them. And as the outer suburbs grow, the fringe will become larger, and the near city will become closer.

Joyce also predicts a continuation of the trend towards smaller homes on smaller blocks, and more specially created hubs around metropolitan areas. This will keep people away from the CBD, putting them into new suburbs which are more affordable, “which of course grows the fringe; governments will be putting in more infrastructure for that to be able to happen. Those states that do that I think will do well.”

The city fringes are constantly evolving and pushing outwards as over-crowding and price pressures shove people into the outer suburbs. “It is pushing outwards,” agrees Lawless, “The population growth is really what’s driving the urban sprawl.”

A cut above?
Associate professor Glenn Otto from UNSW, studied the house prices of outer Sydney LGAs between 1991-2006 and found that there were clear benefits to fringe during this period. He found that average (gross) real returns (capital gains plus rents) to residential property were about 0.25 % per quarter higher in the outer ring LGAs than in the both the inner and middle rings during this period.  

Conversely, he found that most of the real return in the outer ring LGAs was due to price growth rather than growth in real rents. “For example real price growth was about 0.95 % per quarter while the growth in real rents was about 0.04 % per quarter,” he explains.   
Evidence also suggests that the increase in the price-rent ratio for some of the outer ring LGAs in the period 2000-2004 may have been excessive, and Otto points out that prices rose by more than could be reasonably justified by expected rent growth and by anticipated falls in real interest rates.  

He cites the outer Sydney LGAs of Liverpool, Fairfield, Blue Mountains and Blacktown, as a case in point: “their price-rent ratios during most of the 1990s were about 10% below the average price-rent ratio for the inner ring LGAs,” he says. “Over the period 2000-2004 price-rent ratios in these outer regions increased relative to the inner ring until they were about 10-20% higher at the peak of the boom in 2004. Since 2004 price-rent ratios have fallen in the outer regions relative to those in the inner ring.” 

The problem here is that it is difficult to point to any economic fundamental that can explain this sharp rise in relative price-rent ratios in outer Sydney, leaving Otto to conclude that this was probably due to “over-optimistic expectations about future capital gains on houses in these regions”.  

What next?
As of September 2006, price-rent ratios for these four LGAs were still well above their levels relative to the inner ring in the 1990s. “This suggests that there may still be some further falls in house prices in the outer region, or at least a period of relatively flat growth,” says Otto. “It is possible than a potential  investor in the outer regions might be better off to wait until they thought the fall in house prices had bottomed out.”

Tim Lawless, director of property research, RP Data, agrees that investors should take a good hard look at what’s happening in the marketplace before making serious moves. He lists areas like Liverpool and Camden in Sydney’s south and south-west as specific examples, saying they’re “a little bit of a pain at the moment because they over-extended themselves in the last property cycle; prices went a little bit higher than they probably should have and it’s taken them a long time to recover – they still haven’t recovered. Make sure when you’re buying for the outer areas the cycle hasn’t gone out of synch.”


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