So how are ‘investment grade’ properties performing?

One of the things you realise when you’ve been in the game as long as I have is that there are always markets within markets.

So when the headline numbers are saying that property prices are consolidating, you learn to take it with a grain of salt. Sure, some properties somewhere might be on the slide. But there will still be suburbs experiencing strong growth.

That’s why we have such a focus on ‘investment grade’ properties at Cashflow Capital. These are quality properties in growth areas, at accessible price points, and in thick markets (markets with high turnover).

Now some people might wonder why we don’t get into ‘prestige’ properties. Isn’t that where the big money is?

And sure, you can make massive gains in markets like this. But you can also make massive losses, and they’re incredibly fickle markets.

Take this analysis from Chris Joye at the Australian Financial Review for instance. He looks at the premier Sydney beachside suburb of Palm Beach… and concludes as an investment location, it’s a total dud:

Since the end of the 2003 housing boom, Palm Beach property has delivered miserly capital growth of just 1.6 per cent annually (see first chart)… That is, mass-market Sydney houses have provided 2.5 times the upside of their dearer “Palmy” counterparts…

It is actually worse than this. And that is because high-end housing is also riskier than the cheaper stuff precisely because it is a thinner market… This manifests in higher price variability….

In the 2008 global financial crisis, Sydney homes lost 7 per cent of their value. In contrast, the Palm Beach holiday house market slumped a staggering 25 per cent…

These insights also hold when we examine the entire luxury market. Since 2003, the middle 50 per cent of homes ranked by value have outperformed the top 25 per cent by a cumulative 12.8 per cent in pure capital gain terms according to CoreLogic…

He’s right, and this time around it’s exactly the same. It’s expensive properties in ‘thin’ markets that are faring the worst.

In fact, if you look at the cheapest 25% of the market in Sydney, prices are fairly stable, though still down a touch.

So that’s why I don’t recommend to clients that they go chasing the big gains in the prestige suburbs. Not only do they tie up a heap of your capital, they expose you to bigger risks, and tend to under perform investment grade properties anyway.

Not much to love there.

But then, what if you don’t know where to find ‘investment grade’ properties?

Talk to us. We’ll point you in the right direction.

Spiro Kladis
Managing Director, Cashflow Capital

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  1. Anton Gorlin
    2 weeks ago

    would you expect the pricing to go down even further for the lower price market of real estate?