A term that comes up a lot in seminars for budding property investors is "gentrification". It's often highlighted as something of a holy grail in the world of property. But is it always a good thing for Property Developers?
For clarity, gentrification occurs when an older, generally "dodgy" suburb, that was developed a few generations ago, starts to get modernised. Density doesn't always change, but the character of the area does. Some classic examples are Redfern in Sydney, Fortitude Valley in Brisbane and St Kilda in Melbourne.
But surely that's always a good thing for Property Developers? I hear you cry. Often it is, I agree, but sometimes it's not.
To understand how gentrification comes about, let's go back to the starting point. Suburbs tend to appear quite quickly, with the result that most of the housing stock is of a similar age and style. Go for a drive to the outskirts of any of our major cities and you'll see this happening. An area that used to be farmland years ago, now with brand new homes as far as the eye can see.
What you need to understand is that a suburb goes through a number of cycles. You tend to get a bunch of young couples move in because it's affordable, they have kids, then over time the kids grow up and move away. The demographic starts to spread, as some people stay on in their homes as empty-nesters, but others downsize and there's often a second wave of families growing up in the area around the same time.
After a couple of generations, you get a very broad demographic, including older people who've lived in the area and their house for decades. The local shops, once new and exciting, have gotten old and tired. The suburb starts to lose value, rents progressively drop, and before you know it, it becomes known as a bit of a dodgy suburb. Better to buy in the next suburb across if you want to live in a nice area.
Although most suburbs go through a level of renewal every generation or two, major gentrification areas are almost always close to the city, offering the best diversity of transport, work and shops. If you want all the benefits of an inner city lifestyle, then choosing somewhere like St Kilda has always made sense in terms of location and amenities. There's just those pesky issues of drugs, prostitution, crime, dodgy old houses...
Continuing with the example of St Kilda, once people viewed it as somewhere dodgy that they'd be afraid to walk through at night, values dropped, and they stayed there for a long time. Inevitably, though, some Property Developers looked at the cheap property prices compared to neighbouring areas, and started to get interested. Now St Kilda is being reborn as a highly desirable, trendy suburb. It's still the cheapest suburb in the area, though, which either means gentrification still has a long way to go, or it's not enough to eclipse the dodgy reputation St Kilda has had for so long - only time will tell.
Okay, you're saying, but if the area is improving, surely developing property in that area will be a good thing. Not only can I lift the value of the property I buy through development, the whole suburb is going to add more of a lift as it improves overall.
I'll answer that by saying - like most things in property, gentrification has a cycle. Get in during the right part of the cycle, and you definitely give yourself the best chance of securing a cracker of a deal. But if you pick the wrong time, uh-oh.
It's given lots of different names, but at some point you've probably seen a bell curve showing the progression of people adopting a technology, idea etc from innovators through to laggards and more. This curve is important when you're looking for suburbs undergoing gentrification, particularly when massive change is required (St Kilda) as opposed to a refresh (older suburb further out).
I've already talked about some of the factors that might point to a suburb being ripe for gentrification, but just to be clear, these include:
Innovators
Right at the beginning of gentrification, the innovators need to move in. These are almost always the bigger developers, as they have the best margins to absorb the fact that prices may potentially not have risen a lot before their development is completed. They're also the ones who, as part of a big project, can add extra infrastructure and amenity to their project. In essence, their project becomes a "destination", not just another bunch of new apartments.
Unless you're operating on a big scale as a market maker, getting in at the same time as the bigger developers is probably not a good idea. The risk is high, as there's no guarantee their gamble will pay off, and gentrification may simply stall as a result.
An example of gentrification that hasn't worked very well is Docklands in Melbourne. So much development, a complete facelift in fact, and yet it's never really gained the momentum it should, given its location. It's often described as "having no soul". It's a classic example of where gentrification, while providing lots of shiny new amenities and places to live, didn't result in massive price rises and profits. An area needs a catalyst, or to reach some sort of critical mass, before it really takes off, and until that happens, the risk of a flop is very real.
Early Adopters
Once the market starts to move, showing the gentrification is taking hold, this is when the early adopters, or market followers, move in. Some signs to look for, outside of the big developments, are plans for big retailers to establish themselves in the area, fast food chains arriving or updating their existing stores, and the Council reinvigorating public spaces. Essentially, money is being spent in the area.
As a Property Developer, this is one of the best times to jump in. Sure, there's still a risk, but often prices are still comparatively cheap, and you have a good chance of riding the wave as the gentrification process continues at the same time as your development gets underway.
Early Majority
This is a time when astute buyers jump on the suburb as "up and coming", and the suburb often starts to show up as a top pick on real estate forecast lists. Demand means that for a Property Developer there's still plenty of room for growth and profit, although competition may lead to returns not being quite as high as during the early adopter stage. Still, there’s plenty of opportunity to find properties that are both developable and profitable.
Late Majority
By now the market starts to move towards saturation, and new developments are popping up everywhere. By making the right choices as a Property Developer you can still do well, but be prepared for lots of competition and potentially stagnant sales prices, along with more days on market for your stock. Either that, or you will need to find a way to innovate in order to stand out from the crowd, rather than just being another lookalike development.
Laggards
You missed the boat. Okay, that's not quite true - if you buy the right property at the right price and apply the right strategy, you can still make money as a Property Developer in the area. But that's true of basically every area. Let's just say you missed the boat of gentrification instead.
So yes, to some extent gentrification is a great thing when you're out scouting for areas to purchase development properties. But make sure you understand whereabouts in the cycle the area is, and make sure the risk level in the current stage matches your risk appetite before going ahead.
For clarity, gentrification occurs when an older, generally "dodgy" suburb, that was developed a few generations ago, starts to get modernised. Density doesn't always change, but the character of the area does. Some classic examples are Redfern in Sydney, Fortitude Valley in Brisbane and St Kilda in Melbourne.
But surely that's always a good thing for Property Developers? I hear you cry. Often it is, I agree, but sometimes it's not.
To understand how gentrification comes about, let's go back to the starting point. Suburbs tend to appear quite quickly, with the result that most of the housing stock is of a similar age and style. Go for a drive to the outskirts of any of our major cities and you'll see this happening. An area that used to be farmland years ago, now with brand new homes as far as the eye can see.
What you need to understand is that a suburb goes through a number of cycles. You tend to get a bunch of young couples move in because it's affordable, they have kids, then over time the kids grow up and move away. The demographic starts to spread, as some people stay on in their homes as empty-nesters, but others downsize and there's often a second wave of families growing up in the area around the same time.
After a couple of generations, you get a very broad demographic, including older people who've lived in the area and their house for decades. The local shops, once new and exciting, have gotten old and tired. The suburb starts to lose value, rents progressively drop, and before you know it, it becomes known as a bit of a dodgy suburb. Better to buy in the next suburb across if you want to live in a nice area.
Although most suburbs go through a level of renewal every generation or two, major gentrification areas are almost always close to the city, offering the best diversity of transport, work and shops. If you want all the benefits of an inner city lifestyle, then choosing somewhere like St Kilda has always made sense in terms of location and amenities. There's just those pesky issues of drugs, prostitution, crime, dodgy old houses...
Continuing with the example of St Kilda, once people viewed it as somewhere dodgy that they'd be afraid to walk through at night, values dropped, and they stayed there for a long time. Inevitably, though, some Property Developers looked at the cheap property prices compared to neighbouring areas, and started to get interested. Now St Kilda is being reborn as a highly desirable, trendy suburb. It's still the cheapest suburb in the area, though, which either means gentrification still has a long way to go, or it's not enough to eclipse the dodgy reputation St Kilda has had for so long - only time will tell.
Okay, you're saying, but if the area is improving, surely developing property in that area will be a good thing. Not only can I lift the value of the property I buy through development, the whole suburb is going to add more of a lift as it improves overall.
I'll answer that by saying - like most things in property, gentrification has a cycle. Get in during the right part of the cycle, and you definitely give yourself the best chance of securing a cracker of a deal. But if you pick the wrong time, uh-oh.
It's given lots of different names, but at some point you've probably seen a bell curve showing the progression of people adopting a technology, idea etc from innovators through to laggards and more. This curve is important when you're looking for suburbs undergoing gentrification, particularly when massive change is required (St Kilda) as opposed to a refresh (older suburb further out).I've already talked about some of the factors that might point to a suburb being ripe for gentrification, but just to be clear, these include:
- Proximity to work
- Plenty of transport
- Proximity to shops
- Cheap prices compared to surrounding areas
Innovators
Right at the beginning of gentrification, the innovators need to move in. These are almost always the bigger developers, as they have the best margins to absorb the fact that prices may potentially not have risen a lot before their development is completed. They're also the ones who, as part of a big project, can add extra infrastructure and amenity to their project. In essence, their project becomes a "destination", not just another bunch of new apartments.
Unless you're operating on a big scale as a market maker, getting in at the same time as the bigger developers is probably not a good idea. The risk is high, as there's no guarantee their gamble will pay off, and gentrification may simply stall as a result.
An example of gentrification that hasn't worked very well is Docklands in Melbourne. So much development, a complete facelift in fact, and yet it's never really gained the momentum it should, given its location. It's often described as "having no soul". It's a classic example of where gentrification, while providing lots of shiny new amenities and places to live, didn't result in massive price rises and profits. An area needs a catalyst, or to reach some sort of critical mass, before it really takes off, and until that happens, the risk of a flop is very real.
Early Adopters
Once the market starts to move, showing the gentrification is taking hold, this is when the early adopters, or market followers, move in. Some signs to look for, outside of the big developments, are plans for big retailers to establish themselves in the area, fast food chains arriving or updating their existing stores, and the Council reinvigorating public spaces. Essentially, money is being spent in the area.
As a Property Developer, this is one of the best times to jump in. Sure, there's still a risk, but often prices are still comparatively cheap, and you have a good chance of riding the wave as the gentrification process continues at the same time as your development gets underway.
Early Majority
This is a time when astute buyers jump on the suburb as "up and coming", and the suburb often starts to show up as a top pick on real estate forecast lists. Demand means that for a Property Developer there's still plenty of room for growth and profit, although competition may lead to returns not being quite as high as during the early adopter stage. Still, there’s plenty of opportunity to find properties that are both developable and profitable.
Late Majority
By now the market starts to move towards saturation, and new developments are popping up everywhere. By making the right choices as a Property Developer you can still do well, but be prepared for lots of competition and potentially stagnant sales prices, along with more days on market for your stock. Either that, or you will need to find a way to innovate in order to stand out from the crowd, rather than just being another lookalike development.
Laggards
You missed the boat. Okay, that's not quite true - if you buy the right property at the right price and apply the right strategy, you can still make money as a Property Developer in the area. But that's true of basically every area. Let's just say you missed the boat of gentrification instead.
So yes, to some extent gentrification is a great thing when you're out scouting for areas to purchase development properties. But make sure you understand whereabouts in the cycle the area is, and make sure the risk level in the current stage matches your risk appetite before going ahead.
