Explainer on Urban v Suburban investment properties!

In a recent consultation with a buyer, I was asked my opinion whether urban or suburban is a better investment choice. After some thought, my conclusion was conveniently “it depends”! The truth is there are both pros and cons that need to be measured accordingly. One thing for certain, in the Australian market, both tend to have healthy levels of demand overtime, however, at different paces of growth.

Defining Urban and Suburban living

Generally speaking, in the Australian context, Urban properties refer to properties that are considered ‘inner city or metro’ and are characterized by being more densely populated with amenities in walking or close proximity to living areas. Comprised of both high rise or multi-living arrangements as well as free-standing homes, Urban areas tend to see less reliance on cars, more bike (or e-bikes) and with better access to public transport directing towards the city center. Also generally speaking, Urban living is defined by council lines however some councils will spill over and merge both urban and suburban suburbs. This makes defining Urban less objective to define. There have been other ways to define urban as proximity to city or by the general lifestyle attributes for a given area. However, for the purpose of this blog, we’ll define Urban as per the council lines.

Advantages of investment in Urban

One common attribute of Urban living is demand tending to be higher and rental yields tending to be better. This is due to higher levels of population density as people want to live near city centers, social amenities and cultural hubs. In the context Melbourne with its sprawling education economy, you will commonly find major world renowned universities and schools in urban areas driving higher and localized demand. This naturally drives higher levels of growth, with more coffee shops, more bikes and more character to urban areas.

Appreciation Potential

In basic economic terms, more demand translates to upwards pressure on prices. Especially considering Urban areas tend to be more landlocked, hence the higher likeliness for high-rises, duplexes and multi-dwelling living arrangements, land holding is the biggest winner. And when investing in property, the appreciation is championed by the land holding as the home (or asset) depreciates over time (hence the need for a depreciation schedule during tax time).

?Accessibility and Amenities

Urban land provides easy access to social facilities and amenities including schools, hospital and entertainment facilities, and easy access to public transport. Accessibility increases the appeal and value of the property to inhabitants leading to demand as well. A hot tip is to also know infrastructure plans in future (such as a development of a new aquatic center, library or shopping precinct) with accelerated growth likely to ensue for close-proximity properties.

There are several problems concerning investment in the urban properties to be mindful of

Higher Initial Costs

Council and water rates tend to be higher. The cost of land is also higher resulting in more resulting in buyer’s unable to buy-in or needing to compromise with a smaller home with little to no backyard.

Competitive Market for homes and amenities

The real estate in the urban area market is both saturated and competitive. The general selling choice will differ from state to state, however you will find a stronger leaning towards auctions as the choice to sell a home here in Melbourne. You will also find amenities such as schools, libraries and public pools having a higher per capita count for the local areas with some hitting their capacity quota, leading to increased rate of ware and tare, waiting times and less options. And if you’re ever in doubt, you need not look further than public toilets as an inference to local council capacity. This partly explains why inner-city public toilets are dank/nasty whilst suburbs tend to have cleaner public toilet facilities.

The pros and cons of Suburban Real Estate Investments

Benefits of suburban Real Estate include

Better value for buying a home

The biggest advantage of Suburban areas is no doubt the better value for money, particularly when buying a newer, larger home with a bigger backyard and more space to park your car. There is also cost savings with lower taxes and council costs to maintain the home. From an investment perspective, this can help in making your return on investment better since the ongoing cost is easier to manage with less maintenance required for newer homes.

Family-Friendly Environment, higher level of owner occupiers.

You generally find more home ownership in the suburbs, with first home buyers and established families the most common dwellers. You also find more pride of place with neat front yards, safer neighborhoods and more amenities catering to families. Also, you tend to find there is less turnover of tenants as they’re more likely to stay for longer durations relative to urban tenants.

On the other hand, it also faces challenges such as:

Slower Appreciation

Appreciation in suburbs tends to be slower compared to urban areas. Also, growth driven by infrastructure can be slower to come by, thus there is a need to hold an investment for the longer duration.

Dependence on Market Trends

In Melbourne, we’re finding suburbs, particularly in the outer north and west vulnerable to market forces from interest rate hikes and the increased cost of living. This is due to Suburban dwellers more likely to hold a mortgage and have increased dependency with children as opposed to their Urban counterparts that have a high degree of students, singles and young people.

Making the Decision

To choose between urban or suburban real estate investments, compare your objectives, risk parameters, and familiarity with the market. It is useful to reach out to real estate advisory services for professional advice specific to your requirements.

To conclude, Urban Investments are ideal if;

• You desire increased rental returns and faster property value appreciation.
• This means you are ready to operate in a competitive market as well as expect high initial costs.
• You want to take advantage of the closeness to facilities and infrastructure.

On the other hand, Suburban Investments are preferred if,

• Comparing to Urban properties, you desire a bigger and newer house with a larger land holding

• Generally Suburban tenants are more stable & are more long-term than their Urban counterparts.

• You are willing to apply a long term holding strategy, particularly if your strategy is through capital growth creation

To have a deeper conversation about the right investment method for you, please reach out to us at Citadel Agency or follow us for more insight.

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