Why do some locations outperform blue-chip suburbs?

[ad_1]

key takeaways

Key takeaways

How crucial is it to exclusively invest in blue-chip suburbs? That’s what I discuss in this article.

The reality is that some geographical locations will outperform blue-chip suburbs over the next few years.

However, pinpointing these outperforming locations with a high level of certainty is challenging – neigh on impossible.

Even if your prediction is accurate, sustained outperformance is unlikely unless the chosen location possesses robust investment-grade fundamentals.

This is why an asset of high quality, backed by strong fundamentals, is more likely to consistently outperform in the long run.

I was motivated to write this blog for two main reasons.

Firstly, I observed several buyers’ agents on social media proudly advertising short-term capital gains.

One instance caught my attention, where a buyers’ agent claimed to have purchased a property for a client 18 months ago for $435,000, asserting its current value at $510,000, implying 19% capital growth.

However, the actual growth is 17.2% over 18 months or, more accurately, 11.2% p.a. annualised growth.

However, this calculation excludes purchasing costs, making the true annualised growth rate less than 7% p.a.!

Misleading advertising?

Unfortunately, there are few regulations to protect property investors against such misinformation, unlike with share market investments (heavily regulated), highlighting the importance of conducting thorough due diligence.

Secondly, I received an email from a reader, Stephen, asking me to explore the recent boom in regional towns over the past three years, largely attributed to Covid-related factors.

This theme aligns with another topic I’ve been contemplating – how seemingly secondary suburbs at times outperform blue-chip suburbs.

This raises the pertinent question: How crucial is it to exclusively invest in blue-chip suburbs?

Location5

Short-term performance data isn’t very meaningful

Investors and their advisors cannot control short-term market performance.

In the short term, market performance is volatile and unpredictable, with no reliable methodology for predicting it.

However, over extended periods, market cycles tend to even out, making performance more predictable.

Short-term performance is susceptible to unsustainable factors like popularity, while long-term performance is mainly influenced by investment fundamentals.

Investors have control over fundamentals, meaning they can choose to only invest in assets with strong fundamentals, knowing that these attributes determine long-term returns.

While one might experience above-average growth in the initial years of owning an asset, it’s crucial to recognise it as luck, which is not a dependable investment strategy.

Conversely, one can also face a scenario of investing in a fundamentally sound asset and having to endure below-average investment returns for an extended period.

Markets may underperform for longer than anyone might expect, but not indefinitely.

This is why I approach businesses that advertise short-term returns with scepticism, as it often reflects their marketing prowess rather than genuine investment acumen.

On the other hand, highlighting long-term returns is very valuable and compelling.

There will always be locations that out-perform blue-chip suburbs

The reality is that some geographical locations will outperform blue-chip suburbs over the next few years.

However, pinpointing these outperforming locations with a high level of certainty is challenging – neigh on impossible.

Short-term outperformance can be driven by various factors, including promotion by property spruikers, shifts in lifestyle preferences like tree/sea changes, new infrastructure developments, or periods of low interest rates.

The late founder of Vanguard, Jack Bogle, was famous for saying “Reversion to the mean is the iron rule of the financial markets”.

[ad_2]

Source link

Call Us Now