Property Investments in Melbourne: Which properties will perform the best?

The halcyon years when Melbourne’s property market was generally buoyant and performing well have now given way to a more mixed picture. Though for the best part of 20 years it’s been a compelling city in property terms, there’s now a need for greater caution when investing here.

For the past two years, Melbourne enjoyed the status of being the second best-performing capital city for property, after decades of consistent stability. A different scenario is now emerging.

Melbourne still offers plenty of opportunities for real estate investment. However, there are also areas that represent greater risk, where your return could well fall short of your expectations.

So where are the best properties in Melbourne and how can you avoid high-risk locations and types of real estate?

URBAN SPRAWL

To some degree, the patchy nature of Melbourne’s property market is the logical outcome of a location on the rise. It’s in the top 10 large cities in the developed world in terms of growth, and almost 50% of Australia’s new jobs in the last 10 years have been in either Sydney or Melbourne.

This is the administrative, business, cultural and recreational centre of Victoria, meaning it’s home to a widely diverse demographic and an equally variable level of affluence. No city ever grows at an even pace throughout its history or geography. Areas become popular for no apparent reason, while others go out of favour just as quickly.

DRIVERS IN MELBOURNE REAL ESTATE VALUES - DEMAND

However, there are some more discernible factors that are shaping the Melbourne property market. One of the primary harbingers of change is the attraction Melbourne holds for both national and international migration. 

Its property market strength, along with a well performing regional economy, has helped to increase both the population size and relative affluence. Commentators believe the city’s 4.82 million population will continue to grow by as much as 10% over the next four years.

This has driven property prices upwards, not least as there is increasingly a shortfall in the number of new homes built to meet blossoming demand.

The rental sector is also not keeping up with the city’s growth, driving up rents and making it even harder for people to get their own home.

This trend shows no signs of slowing down, not least as Melbourne is a popular location for new overseas residents with its great standard of living. A high proportion of migrants are from China and India – around 32% in fact. This means that the second most commonly spoken language in Melbourne is now Mandarin. 

The significance of this is that it adds to a “zoning” effect, where nationalities and levels of affluence pool in certain areas. It serves to create a more fragmented property market, with some areas of the city performing better than others.

For example, to the east of Melbourne is the older, more stable suburbs, which tend to attract more affluent homeowners. To the west, newer suburbs are changing and growing, including the creation of smaller, affordable homes for new arrivals and younger buyers.

LOCAL AMENITIES AND EMPLOYMENT

A lot depends on the local infrastructure too, and such factors as sources of employment and provision of such things as schools in the locality. 

As the city grows, it has been harder to ensure transparent provision is equal throughout. This means properties close to its airport and along its major rail and road networks can be more appealing than properties in the far-flung reaches of Melbourne. 

Also, affluent inner south-eastern suburbs have enjoyed property price rises above average, as homeowners are close to local amenities and education. If you are considering investing in houses anywhere around the sought-after Victorian government school zones, then you could well ride the wave of higher than average returns.

RESIDENTIAL PROPERTY THAT PERFORMS WELL

According to CoreLogic, in April 2018 the median for a Melbourne property was $720,88110,420. That’s an increase of 5.3% compared to 2017 and represents a colossal 60% growth over a five year period.

So, where are the healthy returns on Melbourne property – in terms of home types?

Though the Australian dream of a freestanding home, with its parcel of land and picket fence, is still strong, as the city grows tastes and needs are changing. There are now more people looking for more compact, easier to maintain properties close to amenities and transport systems.

As there is a shortfall in new builds and rentals in Melbourne to keep pace with growth, there is a greater emphasis on apartments and other properties that are affordable and realistic.

This is not just about new builds either. Some of Melbourne’s larger townhouses are lending themselves to becoming multi-occupant residencies. 

Younger and upwardly mobile people value low entry apartments and can offer medium-term tenancy potential for anyone creating either purpose-built or converted apartments, however risks remain with new apartments, as they can come with a lot of downside risks also.

Melbourne has a substantial number of single storey dwellings, built largely in the 1960s and 70s, which are sometimes referred to as villa units or simply units. As the trend is now to maximise land by building high for multi-occupancy, these low-rise homes with a degree of privacy are becoming more sought after, especially by downsizing retirees, looking for proximity to infrastructure and therefore can make an attractive investment.

COMMERCIAL PROPERTY LANDSCAPE 

If it is larger, business-focused property potential you’re exploring, then Melbourne’s growth trajectory makes it an attractive proposition. However, this too requires careful research and planning to pick the spots most likely to be a compelling case for other investors and for long-term commercial tenants. Coupled with this, the ongoing growth of technology for communication, combined with the business trend to supporting work from home and the changing landscape of industries like Retail, its very important to understand where your demand is going to come from in the future. 

HOW AREAS COMPARE

It will probably come as no surprise that the inner city area is the focus of most new property development in Melbourne, particularly with regard to high-rise apartment buildings.

For example, around Southbank, the prediction is that there will be a further 17,000 residential properties added in the next two decades, alongside the current 9,000 homes. The value of these will depend partially on the quality of development and whether city centre living continues to hold strong attractions, however the sheer weight of volume or ‘supply’, needs to be watched carefully against prevailing trends of demand for properties in these areas.

Fast-growing suburbs with greater diversity and a growing population tend to be on the west and northern outskirts of Melbourne, such as Truganina, Point Cook, Melton South and Wyndham Vale. These suburbs typically have strongest demand from new home buyers, meaning they are likely to be impacted by economic factors like rising interest rates more than more established suburbs as a general rule and can therefore have greater cyclical fluctuation in return.

The more established neighbourhoods around the south-eastern suburbs and Bayside may well prove more attractive for family households and middle management homes. The most affluent areas are generally located in the eastern suburbs of the city, however this obviously also comes with the price tag to match, which can limit your investment choice. 

Property in the inner eastern and south-eastern suburbs of Melbourne should be of particular interest for potential return on investment. Older single storey units are currently well on trend and as always, land in these well established areas is what is scarce, so if growth is your main driver, maintain awareness of your land to asset ratio in desirable pockets.

In conclusion, there is no one strategy that works in property investment, however to be successful you need to understand the supply and demand metirc’s first and foremost, to achieve long term investment success. Look for places with good access to transport systems and, infrastructure, with contested and sustainable demand then aim to hold onto your investment for the long term.

Read about why choosing one or two quality properties and letting them grow usually makes the most sense