How gentrification can unlock capital growth

How does the process of gentrification impact property values? We speak with John Zheng, managing director of LJ Hooker at Pyrmont, to find out.

Gentrification is a tricky topic. It can see neighbourhoods transformed as wealthier resident move in, but it displaces the original residents and can make life harder for disadvantaged people. For property investors, unfortunately, gentrification can be a big factor in unlocking greater capital growth.

Q: What is gentrification?

John-Zeng

Zheng: I think it’s the transformation of a deteriorated area into a more developing and urban suburb, and I think there are a number of processes that any area has to go through for this to occur. For example, you need to identify the need, the benefit of this transformation, and the need for infrastructure. I think infrastructure is the key to this process.

As far as I understand, for the infrastructure to take place, it needs both public and private investment into the area to happen. If infrastructure is underway, if the private sector is involved in the development, then it requires public awareness through some sort of promotion to the area so people know that this particular area is undergoing gentrification.

I think the government needs to promote the area first, because the government needs to provide information to the public about what the trend will be for those areas. I think government infrastructure needs to be accomplished first to attract attention and investment into real estate.

Q: What factors contribute to gentrification?

Zheng: An increase in the population. That’s why there’s a need for the area to be improved and there are other factors that come with that. For example, in terms of work commitment, young people are working long hours and don’t want a long commute, so they need to live somewhere close to the city. That’s why some of the city fringe areas that are run down or deteriorated have potential for gentrification, because those areas will attract working class people.

The other factor that contributes to gentrification is associated with geographic location. For those public and private sector investments, it needs to be in a geographic location that will benefit all the community.

Q: What are the main benefits of investing in areas undergoing gentrification?

Zheng: The main benefit is improvement in lifestyle. That’s why I’ve seen a number of suburbs go through this process. People want to improve their lifestyle. They don’t want to drive one or two hours to get into the city for work. They want to have more time to do things they like to do.

For investors, the potential capital growth in an area is definitely one of the key things to look for. Also, the area going through this process could be an emerging suburb, and we can see that the suburb will continue to grow.

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Q: How can gentrification increase property prices?

Zheng: Over time, gentrification will increase both demand for rental and demand for property, which will increase property prices.

Q: What areas will benefit from gentrification?

Zheng: In Sydney, I think areas like Waterloo, Chippendale, Green Square, Water Creek near the airport will benefit from gentrification. These areas I can see are about to go into this process.

Green Square is one example. A few years ago,the Green Square station was built, and it's an area near the airport and the CBD. It’s not far away from the CBD, and that area has a lot of potential because it used to be a lot of warehouses and a lot of old terrace houses. Now, developers can come in and redevelop the whole area, and people can easily commute to the city because its only two stops to get to Central Station.

Gentrification Green Square

Green Square Station

Q: Do you think gentrification is something that both owner-occupiers and investors should consider before investing in an area?

Zheng: Definitely. I think the major benefit goes to the investor, because you can see capital growth in those areas in the medium-long term.

There is also benefit to owner-occupiers, but it depends what stage of the process the area is going through. If it's at the beginning of this process, then the owner-occupier can hopefully get more capital growth. Or maybe it's been through this process a few years ago and it's just about to be completed, in which case the area is good for owner-occupiers because the infrastructure is already there. However, they’re not going to get as much capital growth as those who go there in the early stages of the process.

If people are able to identify that an area is about to go through this process, then I would recommend people to invest in the area because you’ll get the most of the capital growth. As long as they think this process is definitely going to go through, and the government has the funds and the urban planning in place, it's an area that people should watch.

Investment loans versus owner-occupier home loans

Q: Are there any risks to investing in an area experiencing gentrification?

Zheng: It all has to do with risk and benefit. Where there is the potential to benefit, there is also some risk. It depends how long this process will be. If you’re investing at the beginning of the process, then you need to have some idea of how long the process will be, such as whether you’re able to wait 5-10 years for it to be completed. So people need to understand the process and how long the process will take.

One of the risks for owner-occupiers is if the owner is going to buy in an area at the beginning of gentrification. The facilities and infrastructure may not be ready at that point in time, so that’s an inconvenience when buying property in the early stages of the process.

Waterloo is halfway through the process, but the infrastructure hasn’t been able to catch up with demand or the needs for the area. For example, public transport there is an issue. There has been a lot of development and lots of apartments being built, but public transport has been left behind, so it could create a lot of inconvenience for the community to get to the city.

Q: How does ‘cafe culture’ impact a suburb’s value?

Zheng: The reason people want to move to emerging suburbs, or those undergoing urban renewal, is they want to improve their lifestyle, so anything that facilities improvement of lifestyle will improve the area, and cafe culture is one of the things that will attract them to that area. As long as there are restaurants, pubs and bars, those facilities will attract younger generations to those emerging suburbs.

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Rates last updated December 14th, 2018
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
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3.59%
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3.82%
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Earn Velocity Frequent Flyer Points with this mortgage to spend on flights and more (for a limited time, subject to eligibility requirements). Redraw facility available on this variable rate home loan. Competitive interest rate.
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Get one free online redraw per month and pay no ongoing fees. Application fees are waived for loans above $150,000. Plus $1,500 cashback offer for eligible refinancers.
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Get a sharp rate plus package discounts and a 100% offset account.
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A home loan with no ongoing fee and a redraw facility that you can borrow up to 95% LVR.
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An essentials variable investor mortgage with a high borrowing amount so you can fund a large purchase.
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Earn Velocity Frequent Flyer Points on your mortgage (subject to eligibility requirements). Plus, access a 100% offset account to save on interest.
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Belinda Punshon

Belinda is a journalist here at finder.com.au. Specialising in the home loans and property sections, she is passionate about helping Australians improve their financial wellbeing.

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