Why will established property always outperform ‘off the plan’ and new development real estate?
The foundation of a successful property portfolio is dependent upon accumulating quality investments. However, a question which comes to mind is “what constitutes a quality investment?”. Does this include established homes, or ‘off the plan’ and newly developed properties?
Beginning with ‘off the plan’ and newly developed real estate, a key disadvantage is the developers profit margin. Initially, developers set the price for these assets and in most cases, are then sold through referral networks such as financial planners and accountants. These networks are paid commissions anywhere between 5% to 10% and this is factored into the purchase price. As a result, a meaningful percentage of a newly developed or ‘off the plan’ property’s market value is lower than the purchase price upon settlement. However, despite the immediate loss in equity, investors are attracted by the asset type’s depreciation benefits and aggressive marketing campaigns. What most people fail to recognise when embarking on this strategy, is the importance of scarcity, location and value add potential associated with established homes.
Established homes are often a scarce product thereby proving advantageous to investors.
As new developments continue to increase in numbers, this further compounds the scarce supply of established homes, growing their intrinsic value. Examples are seen in character homes where heritage aesthetics, building characteristics, protective planning regulations and the inability to authentically recreate the asset limits their supply. In juxtaposition, the majority of new developments lack this key element of scarcity. They are often duplicable in nature and locked within zones susceptible to density changes. As a result, the value of ‘off the plan’ developments may be stunted by their lack of separation and elastic supply.
In many cases, established homes are positioned in ‘blue chip’ locations.
Subsequently, the asset can gain numerous benefits. These benefits include proximity to a CBD and appealing amenities which results in access to high quality tenants and strong long term capital growth rates. In comparison, due to factors including land availability, new developments are often pushed to outer regions. Investing in such areas can result in a further distance away from the CBD, amenity issues and long term lower growth rates.
Value Add Potential
Established properties have the capacity to manufacture monetary gain through value add potential.
Medium to long term strategies include extensions, redesigning floor plans and improving key internal amenities such as the kitchen or bathrooms. This can increase the capital value and cash flow of the property, depending on the market of course. In contrast, newly built homes are often already modern and fully capitalised, limiting any value add potential. In such cases, internal renovations to the property would merely reduce functional or structural obsolescence generating minimal value add to the home.
Nevertheless, while established and new developments each have their merits, maximising an investment’s value can only be achieved when a proper strategy is implemented. As ‘off the plan’ developments may benefit investors through tax incentives, it is clear that from a growth perspective, better results can be achieved by purchasing established property. For example, a cottage located on the edge of the city contains the key elements for a strong preforming asset including scarcity, location and value add potential. Choosing the right asset is a critical decision which requires thorough due diligence, market analysis and expert opinion – all of which can be provided with the support of Performance Property Advisory.