“Don’t miss this opportunity to invest in this high growth area. Nestled within a beautiful bushland setting, this brand-new 4-bed, open plan, brick home, within walking distance to the lake, parks and golf course. Perfect for the astute investor, this quality home will appeal to a broad rental market. Buy now, hold, and watch your investment grow!”
Before you get too excited, no, we are not about to provide you with a “Hot Tip”. What you have just read is a typical advertisement for a new house-and-land package with some clever wording to target the investor market.
With so many new housing projects being developed in attempt to cater for our growing population come so many extra ‘traps’ for property investors. Greenfield investments are something which we will continually see more of. Mark our words, DIY investors will continue to invest with their eyes and ears (instead of their head) and end up buying properties thinking they’ve secured a pot of gold.
What Are Greenfields?
A “greenfield investment” is a generic term used to describe an area of previously undeveloped land. Take a drive north or south out of town, look left and right when you get out of the existing built-up areas, and you’ll see fields of trees; hence, the term “greenfields”. They are generally pockets of land located on the outskirts of an existing urban footprint which have been released for urban development or master-planned communities.
Most of these ‘communities’ now incorporate some kind of man-made lake, marketed as “Springs”, “Lakes” or “Waters”. The top soil from the ‘lake’ is used to raise the lie of the land on housing sites for drainage purposes. The remaining hole in the ground then acts as a convenient marketing tool when referred to as a ‘lake’ or ‘spring’.
Other than ‘the lake’, marketing material also promote facilities such as a range of housing solutions, energy efficiency, communal spaces, parks, attractive streetscapes, and landscaping. Subliminally, they are creating a feeling of community. However, most of these communities have stringent house design guidelines, covenants and quality controls in place, which restricts your ability to make your home individual. This is why every second house will look the same and there is an obvious lack of character.
But, never mind… you’ve got a lake with ducks in it!
Our Greenfields Theory
As always, our comments have nothing to do with the logic that one may use in selecting the family home – the purpose of our research relates to maximising investment returns for property investors.
A while back, Propertyology conducted a study on properties from within several randomly chosen greenfield projects in south east Queensland. From these projects, we collated the initial purchase price of sixty individual properties which were purchased new and we also collated the sale price and date from when those same properties changed hands ten years later.
Our study found that the average annual price growth for these properties over the ten year period (2000 to 2010) was around 4.6% compared to the greater market average of 11% per annum.
To put these returns into dollar terms, a $450,000 property purchased today and increasing in value at 4.6% per annum for would be worth $705,000 ten years later compared to $1,280,000 if the initial $450,000 grew by 11% per annum for ten years. The actual rates of future price growth is not the point, more so the significant difference in price growth when comparing a property from a greenfield estate to other properties which are more centrally located albeit still within the same city.
Here’s Propertyology’s thoughts on why greenfield properties produce inferior price growth than more centrally located properties:
1. Greenfield estates are generally released in stages. Imagine you’ve purchased your new property in Stage 1 for $450,000
2. A year later, Stage 2 is sold for $470,000. With twelve months of ‘shine’ taken off it, what is your Stage 1 property now worth? $440,000 perhaps?
3. Fast forward another two years and Stage 3 is released, with a comparative property to your (now) three-year old property selling for $480,000. And so on.
4,=. The value of your property will always be a margin below whatever the new stages are sold at.
5. Meanwhile, the market in built-up areas is probably growing quite nicely.
Properties released en-masse (or stages), as happens with new housing estates, often creates an initial over supply situation. For values to go up, we need competition and that occurs when there is under supply. Property valuers (and buyers in general for that matter) rely on recent sales data of other similar properties in the area when determining what something is worth. If so many properties are all largely the same, it is very difficult to refute that another property is worth more unless there is something compelling different about it.
Greenfield locations are often quite some distance from major employment nodes. There is often a lag of several years before the development of quality social infrastructure occurs (major shopping centres, health care, cultural outlets, schools, efficient public transport, and so on).
After a period of time, that initial romance of owning a brand new home in a new community with a beautiful duck-filled lake gets taken for granted and some of the original members of the community start to place greater value on the convenience of living closer to work and various forms of social infrastructure.
