New Projects and Capital Growth - You Might Be Surprised
Property investors are always on the lookout for new projects like shopping centre upgrades, new train stations or even a new hotel being built as the belief is that it will create capital growth in those areas. But is that actually the case?
One of the key growth drivers experienced property investors always take note of are new projects that rolling out in certain suburbs.
The belief is that with new projects such as shopping centres, entertainment precincts, infrastructure like a new train station, or even a mine, comes with it a stronger chance of future capital growth in those areas.
But is that actually the case?
At Ripehouse Advisory, we’ve started to analyse the impact that these new projects are having on the immediate areas and how they might impact growth going forward. As well as assessing some states and areas that are spending money on projects that have the potential to really boost property values.
And the results are not what you might expect.
To start with, we took all projects across the country, that had a value of $20 million or more in a host of public and private categories. At this stage, there are currently around 1500 projects around Australia in categories such as:
- Agriculture, Forestry and Fishing
- Community and Other Services
- Electricity, Water and Gas
- Finance, Property and Business Services
- Transport and Storage
To be able to compare how many new projects are coming online in a given location, the most effective way is to compare Local Government Areas (LGA). That way we are looking at a like-for-like situation and not trying to compare inner-city Sydney to regional QLD.
These two charts allow us to compare the total project spend and the per capital spend across the top LGAs in each group.
What’s important here is to consider not just how much money is being spent on new projects, but how many people are going to ultimately benefit from the new project.
For example, Brisbane City LGA has more than five times the number of residents compared to the Sydney City LGA . There are a lot of great projects underway or in planning, and a high overall spend, but when compared to other LGA’s, the per capita spend is low. So will the people reap the rewards?
Moreton Bay, a darling location for misinformed investors, ranks 5th on the total spend, but way down the list at 37th when we look at a per capita spend.
While overall spend in and around the Perth LGA is low compared to other major city and inner regional LGA’s, however, when you compare the per capita spend, they are one of the front runners in new projects.
One standout that has caught the eye is the Charters Towers LGA in QLD. You’ll notice that overall spend is sitting at over $25 billion, and we have recognised that there is over $80 billion in projects on the horizon. However, there are only 12,000 residents within the LGA, so how will that level of spending benefit the local residents?
Even after breaking down the spending in the tables above may still be a little deceptive and we need to consider a few other factors outside the total project spend:
1. How will the project impact the local community?
2. How many jobs will be created after the construction phase and at what salary?
3. Where will future employees live – local or elsewhere?
These are the questions we must ask, particularly when figures like those for Charters Towers get thrown up.
Here’s an example of why we need to dig deeper into the numbers.
Let’s say a new hotel is being built in Bondi at a cost of $150 million. From our data, we know that this hotel will create 50 jobs in the construction phase and 90 ongoing jobs in the form of management, housekeeping, kitchen staff and so on.
We aren’t concerned about the 50 construction jobs – it’s the 90 ongoing jobs we focus on. The important part is, how many of these new employees will live in Bondi when they start work at their new hotel job?
The answer is likely to be “not many”; let’s say 10% at most - there probably aren’t a lot of housekeepers or chefs who can afford to rent or buy in Sydney’s eastern suburbs. We might realise that 25% of employees for this new hotel in Bondi actually live in the City of Parramatta LGA.
When we uncover this, we assume 25% of the new employment from that project to the City of Parramatta and only 10% to the actual LGA the project is located in. It is these figures that provide the true impact of this new project on property figures.
We need to take into account more than just the total spend; we need to look at the scope of the project, the type, the employment and then WHERE employees will actually live. When we break the figures down this way – they change dramatically.
That isn’t to say that new projects don’t have a benefit to the local community, because on a whole they do. But the various types of projects we listed earlier, don’t always have a positive effect.
A new mine, for example, may detract from the desirability of an area and have a NET negative impact and employees might not live in the town. New infrastructure, health and shopping areas, on the other hand, have a NET positive impact.
Going back to the hotel in Bondi, we can safely assume it will attract more tourists to the area, which means more money spent in restaurants, bars and shops. So the total impact of a new project must be added to the mix.
When we combine these projects with all these extra factors we can quickly highlight the LGA’s with the best new projects that will impact local demand for housing from both current and future residents.
The local impact is something we focus heavily on at Ripehouse and for this reason, we created the Ripehouse Project Spend Score which puts all this data together.
Based on this we found some interesting information about the current conditions around the country:
- There is not one QLD LGA in the top 10
- NSW has four LGA’s in the top 10
- Tasmania punches above its weight with 4 LGA’s in the top 30.
When considering the value a new project is bringing into an area, you clearly need to think about more than just the dollars and cents.
A good project creates local jobs, adds to the vitality of the area, encourages spending and importantly has a big impact on a number of people.
So it turns out the raw data isn’t always so straightforward.