Value-Adds: Tomorrow's Value; More Important than Today's Price.

To buy a property simply based on what it can deliver currently is short-sighted and can be a critical error. We must approach a property based on tangible and quantifiable benefits that the property can deliver in the medium to long term. Read on:

To buy a property simply based on what it can deliver currently, is short sighted and can be a critical error. We must approach a property based on tangible and quantifiable benefits that the property can deliver in the medium to long term.

We all work hard and many of us do so with the aim of building up enough money to invest in property and have our money start working for us. Property has created immense wealth in Australia, particularly over the last 25 years where values have continued to rise on an almost uninterrupted, upward trajectory.

But now we are now in a situation where property prices are extremely high and the associated yields are getting squeezed to almost nothing. Moreover, there is so much capital in the market leading to immense competition for many properties, especially the traditionally desirable ones such as those in blue chip locations or those with legacy tenants.

This can lead to some negative outcomes for the more 'retail' investor and would-be investors. Firstly, non-institutional investors or would-be investors can be completely intimidated preventing them from even putting their hat in the ring. A whole section of the market can feel like they have no chance at securing valuable property and become completely disenfranchised from investing in property. We certainly can't have that.

Another potentially negative outcome of this highly competitive atmosphere is that investors feel that they have to settle for the cheaper or less desirable properties. If they don't understand the reasons why there is less interest in these properties or why the price points are markedly lower than others - but simply focus on the fact that they are just more affordable, they can be left with a dog that doesn't deliver long term value. We don't want that either.

So what can be done to mitigate the impact of the current market conditions, on retail investors?

Obviously there are myriad ways to approach this problem and there is no silver bullet. I have chosen to focus on the concept of value-add to tackle this issue. This is commonly the approach of many of our clients who are seasoned investors and can be applied to any scenario and price range.

To buy a property simply based on what it can deliver currently, is short sighted and can be a critical error. We must approach a property based on tangible and quantifiable benefits that the property can deliver in the medium to long term. There are various ways to add value to a property. Some involve additional investment down the track, but not always.

Let's discuss a few examples:

Development

This is probably the most obvious where an investor purchases property with a view to demolishing it and building a development that significantly increases the sales value or income generating potential. This obviously involves significant investment, over and above the initial outlay to purchase the site. When going down this path, it's really important to understand your borrowing power and how debt can be leveraged to not only assist with the property's acquisition but also for construction funding. You must also consider the planning regulations in the local area to be sure you can implement your plans successfully.

Augmentation

This is where the intention is for the original property to remain with some construction to occur down the line to increase the value. Examples can include a stand-alone retail shop which can have residential dwellings built on top or a single level warehouse where some offices are added above. Like the development example, this can involve significant investment but this can be put off for some time with the existing site providing steady income in the meantime.

A more 'out-of-the-way' purchase

As the popular locations become more and more unaffordable for mum-and-pop investors, savvy players are looking further afield to scoop up property in developing areas. These properties are often off the radar of more institutional investors and as such, are often less expensive and the buying process is often less competitive. These investments can still deliver significant upside if the right factors are in place. The challenge here is how to know the difference between a gem and a dog. Some things to look out for are: growth in the surrounding area, level of development and the existence of national retail tenants - the amount of research that these companies put into their retail placement is significant. It's safe to say that if Coles, Woolworths, Aldi, Supercheap Auto etc. think it's worthwhile to have a presence in a particular area - it might be worth paying attention to.

These types of investment are often less of a drain on capital resources and can be a fantastic way to enter the market for the first time. The trade-off here is that it may take some time for the area to develop and for your investment to reach a target value or income stream.

The point here is that a property's value or price today may be the hurdle you need to overcome first, but actually say nothing about the property's long term value as a stand alone metric. If you can't see how or why a property's value will grow and what it will take for that growth to occur - you're probably not yet in a position to make a bid.

But that doesn't mean you can't or won't be a successful property investor. It just means you need to do your homework and maybe be a little bit more creative in considering what you might invest in. Most importantly, never scare off or allow yourself to be intimidated - there is something out there for everyone.

As always, this article is not intended as professional advise or financial advise. Always seek independent advise from a trusted source before investing.

If you think this could be of use to you or your business, don't hesitate to contact us to have a confidential discussion.

If you are keen to learn more get in touch with the team at CapStack.

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