Infrastructure – reaping rewards of rent and capital growth of major projects

Driving_on_the_Great_Western_Highway

Infrastructure and its effects

Infrastructure is basically major public works and amenities which support the economic activities of a township, community or city. These major works include transport infrastructure such as roads, bridges, railway lines and major highways. Public works and amenities may include power stations, communications facilities, new retail and commercial precincts, business parks, shopping centres, hospitals and large education and learning institutions.

These large infrastructure projects stimulate the demand for real estate as it create jobs, demand for goods and services and provide more effective use and connectivity of economic resources. An increase in economic activity means new and greater disposable incomes which in turn will boost economic growth. More people are attracted to buy and rent real estate in locations which are in close proximity to these major works.

New roads and highways increase the accessibility and transport efficiency whilst a new hospital or university will create more jobs, increase demand for local housing. Shopping centres and business parks have the effect of increasing the retail and commercial mix within an area. If these new investments increase the number of people living in the area, improve travelling times and provide greater employment prospects, then the effects on local real estate values in terms of rent and prices will also be strong.

What type of infrastructure should investors look out for?

Property experts believe that transport upgrades such as new or improved roads and railway links, new shopping malls, hospitals and universities to be key infrastructure and public amenities which are likely to have a strong impact on the residential property market. These type of infrastructure have an effect on the lifestyle of local residents in that it improve travelling times, provide greater conveniences and public amenities and enable better access to and from work. New and improved transport infrastructure which provide better access to the CBD generally broadens the appeal of an area as it saves commuting time for city workers. This is especially so in all major Australian capital cities as land is scarce around these high demand areas. New hospitals, universities and colleges will attract a host of medical professionals and academics such as doctors, nurses, teachers, students as given a choice, these demand groups are likely to prefer living closer to their work place. In general, transport infrastructure such as roads and railway, hospitals and universities are strong drivers of property prices.

Other infrastructure projects such as mines, sea and airports, power wind and desalination plants can create massive job opportunities and demand for local housing. However, some property analyst believe that the effects of resources projects and power infrastructure are not usually as long lasting as the impact of transport projects. The rationale for this is that resources and power infrastructure will create jobs and demand for housing during its construction stage and will slowly dissipate as the projects are completed as it requires less manpower to maintain upon full operation. Mining projects which are unsuccessful have the adverse effect of job losses and this may negatively impact an area.

Questions to ask when deciding on the impact of an infrastructure on the local property market may include the following:

  • What is the resident profile which the project expected to attract?
  • How many new residents will the project generate?
  • How will the project affect or change the demographics of the area?
  • Is there a long-lasting impact on the area in terms of permanent employment prospects or whether changes are transient and temporary?
  • What is the supply and demand ratio of residential dwellings in the area and how will the project affect this ratio?
  • Does the local residential market have strong intrinsic factors such as good rent, affordable and competitive prices and strong capital growth history, notwithstanding the new infrastructure?

Notwithstanding the answers to the questions above, a potential area affected by impending infrastructure works which investors are targeting should, in general, have all the right criteria of a good investment proposition BEFORE considering the new works – strong historic growth in rent and prices, good demographics and public amenities such as shops and schools and close to transport link. Investors should be aware of infrastructure announcements which ultimately do not take place for a host of reasons – lack of planning, political wrangling, poor budgeting etc. Therefore, should the infrastructure project fail to materialise, then the area can sustain and support itself into the future as a result of its existing demand drivers.

Protestors - Sydney's second airport

Timing of investment

Infrastructure projects usually affect property market in 3 phases:

1. Project announcement

2. Project receives final approval and commencement of works

3. Project completion where perceived benefits are transparent to all investors

The “most appropriate” timing is really a trade of between risk and return and investors’ risk profile. Investors who go in early stand to gain the most but is also bearing the greatest risk. Some projects may commence according to schedule, some may be delayed and some do not happen at all. It depends on how one feels about the risk because buying on first public and usually political announcement is high risk due to the number of instances where projects are announced during an election campaign and quickly forgotten afterwards or bona fide projects being delayed  or scrapped due to poor planning and inadequate budget. Therefore, an initial investment will end up being a dud if the project does not happen but if it takes off, then you’ve set yourself up before all the growth that’s about to materialise.

As a trade-off, the “most appropriate” time might be when the project commences or one can sense that “it’s all happening”. This way, much of the risk is minimised as the growth is certain but has not materialised. In general, capital growth tends to accelerate as the project nears completion and then a further surge upon completion once the benefits of the project are apparent to the community.

Inherent risks

Some project may actually be detrimental to property prices and growth if the development happens too close or too far to residential areas. Location is key and sometimes it is difficult to be fair to all as certain areas may have a more negative or positive impact than others. Protests and local objections have all been observed and well documented such as the desalination plant in Kurnell, Sydney’s second airport at Badgerys Creek. If a major highway is approved and constructed directly in front of a block of apartments with views of the city, this will most certainly affect the prices of those apartments.

If you have to invest in a suburb with a train station, you might as well be as close as possible to the station but not too close to the point of experiencing train or commuter noise. Why invest in an area of a suburb with a train station which is too far to enjoy the benefits of its walking distance? My personal experience is that I have always preferred to buy in a location which is close enough to reap the benefits of a public amenity such as a train station, shopping centre or business park without having to contend with public noise, over-looking issues, commercial and retail traffic commotion and main-road sight. One can directly see the trains and commuters from a distance without having to put up with noise and chatter. Those train commuters who come to work at the business park and shopping centre may also be thinking about how convenient it might be to live in the same location as their work place and hence, lending support, growth and future sustainability to the suburb as a whole.

Key websites about future infrastructure plans in Australia include the following:

National

New South Wales

Victoria

Queensland

Western Australia

South Australia

Tasmania

Australian Capital Territory

Northern Territory

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