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PRIME PROPERTY AND INVESTMENT SECURITY
Copyright © 2005 John Hopkins

Committed, long-term investors not only want returns on their money; they’re looking for flexibility and for a strong degree of security as well, such as can be found in bonds, debentures or even shares.

However, a very attractive balance of security and returns is to be found in direct property investment.

Investment in property is a lower risk option than, for instance, placing money in 10-year government bonds. It is also a continual strong performer in the long term. Property is extraordinarily resilient, better able to absorb shocks and deal with economic challenges than most other investments.

So at times of movement towards more defensive stocks, it’s quite understandable that we see money taken out of the sharemarket and re-invested in the property market as a solid, long-term investment—a safe haven. It’s a sensible defensive move. The property market is not as vulnerable to world events as the sharemarket and other forms of investment.

Property should never be overlooked as a long-term investment. It can usually weather any economic storm—even a global recession.

Of course, the property market, like any other market, experiences cyclical fluctuations. Downturns can be unexpected, disconcertingly rapid, and of variable duration. It is at such times that we hear the alleged property pundits tipping that there will never be a recovery.

How wrong they have always been!

Both slumps and booms tend to have short-term effects on the property market. Indeed, it has been the housing sector that has generally always been the first to recover from recession, and so long-term property investors who carefully planned their investment strategies were relatively untroubled during the recessional segments of recent economic cycles.

A long-term approach and commitment
Too many people still fail to realise that for other than the highly experienced or lucky operators, real estate is not a short-term, profit-making venture. If the commitment to property investment extends no further than a gamble on quick profits, short-term predictions may well be important. A speculator may want to buy at the bottom of the market and cash in when it rises, but the astute, bona fide property investor has this long-term commitment that makes cyclical fluctuations—booms and slumps—and even interest rate levels less important. If you are using property investment as a path to long-term financial security, you don’t need to be too preoccupied with property cycles. Genuine property investors select their properties very carefully with the intention of holding onto them. Adopting this long-term perspective means that such cycles—and crystal ball gazing—are largely irrelevant.

If we consider prices for property, particularly premium real estate, over the past 20 years, we note a series of short-term booms and slumps. In the long-term, however, property values have increased consistently, staying well ahead of inflation and surpassing just about any other investment you would care to name. Very few other investments can promise this. Historically, the value of quality real estate has eventually always increased beyond its previous high point.

The property demands of a growing population will, in the long run, ensure continuity of demand. The Australian property market over the past seven years has outperformed most forms of investment.

Although values can decline, as sellers have to accept lower prices for their assets, property is still a strong long-term performer. It has risen in value in each decade of Australian history. One way for investors to avoid losing money in real estate is to resist selling assets during the hard times.

Effective property investment requires this long-term perspective—and a long-term commitment. Fortunes in property are rarely made overnight. But at the same time, it is practically impossible to lose your property investment portfolio if you have structured it correctly. Almost all successful investors have held on to their property for years.

Sound, gainful property investment is not based on predictions about short-term economic performance. Rather, it is grounded on solid statistics: the growth in prime property values over many years has been measured at 10-15% in excess of the inflation rate.

However, in what sort of property should you be seeking to invest?

Prime Property
In general, any property within the bounds of a major metropolis has the potential to offer pleasing returns in the medium to long term. However, investors increase their risk if they buy property in areas of relatively low demand because it is cheap or because they cannot wait for the best property to come along.

It is prime property, which, by our definition, encompasses the best five to ten per cent of property available in the marketplace at any one time, that offers what every investor should be looking for—maximum returns. It is this type of quality property that has the remarkable ability to ride out financial storms and to behave in reliable, predictable patterns.

Prime property will always be the centre of property market activity. Its value will lead the rest of the market and show consistent growth. During times when property demand may level out, inferior properties will feel the effect first and be the last to pick up. Prime property, however, will usually come through any general market fluctuations largely unscathed. Although it may fall in price, its future value is assured.

It is a fact that, over time, this type of premium real estate grows in value. So if you buy the right property—prime property—its value can see an increase even if the market is in decline. It is rarely affected to the same degree as other property. To be sure, there are times when even prime property values may not rise at a great rate, but they seldom go backwards. In the medium to long term, prime property values have always increased.

Always purchase the best possible property you can afford with a view to holding it as a longer-term investment. Remember that the real rewards in property investment are not achieved overnight but over a period of time. Buy and hold for the long-term; buy the best, affordable property in the right location and consider retaining your investment indefinitely. In this way, original purchase costs are amortised over a long period and gains are not diminished by the expense of selling and re-buying and, also importantly, the effects of any slumps—and booms—can be disregarded to achieve a consistent increase in value.

Real estate has been described as a “fundamental commodity”. Property is here to stay! A commitment to only prime real estate is your guarantee of security.