Peter's Perspective
11th October 2014 by Peter Churchouse

Location, Location, Location

These are the first three rules taken from Peter’s Rules for Buying Real Estate – Lesson from the Trenches, a special report available to subscribers of The Churchouse Letter in which he outlines his key rules for successful real estate investing.

Rules Number 1 to 3

It’s a cliché. But it’s true, for all types of real estate. There are thousands of things that differentiate one property from another, but location is the most important.

Location has a bigger impact on property price than any other single factor.

You can buy the grandest house in the world. But if it’s next to a factory or in the middle of a rundown neighbourhood then forget it.

Prices can vary significantly at a very local level. The position of a property on one side or one end of the street matters. Prices can differ enormously within and across neighbourhoods, suburbs, and districts. Access to transport, schools, shopping centres, and jobs all influence property prices. Often more than you think.

This is a key factor that makes real estate investing one of the most fun and rewarding activities in the investment world. When you get it right, the rewards can be huge.

It’s up to you.

The secret is it’s up to you. Not an agent. Not the real estate section of the local paper. You. It’s your judgment and analysis that makes the difference. But it does require the discipline of really understanding the locations and understanding the factors that do and will drive differences in price over time.

This rule is about judging the popularity of one position over another. It is about judging human nature, and what drives people to pay more for the same piece of property in one location versus another. It’s about judging what’s driving the price in a location now, but also what is likely to drive it in the future.

It can take some time to understand all the subtleties of price differences according to location. But the big picture is rarely too difficult. A casual observer can see that apartments overlooking Central Park in New York are highly prized. That apartments in Knightsbridge, London are amongst the most expensive and sought after in the city. Properties with views of Sydney Harbour and Auckland Harbour fetch premium prices in those markets.

But the subtleties are not always so obvious. For High Rise buildings in Hong Kong there is a very clear price pecking order. The price per square foot typically goes up by a closely defined amount for each floor going up the building. For example, the price may rise by say US$15 per square foot for each higher floor. Apartments with “green views” may sell at a 15% – 20% discount to those with “sea views”.

In some societies, personal taste may not accord high floors with such a price premium. Living on high floors in some societies may be seen as a negative rather than a positive due to perhaps say fire safety concerns, time to get in and out of the building, distance from apartment to car park, and so on.

Cities like London, and to some extent New York are basically an agglomeration of villages connected by transport infrastructure. Each village has a different character, a soul that appeals to different people in different ways.

Age and family position influence popularity for different locations. Families are concerned about education, access to schools, sports facilities, and ability to enjoy a back garden for kids to play in.

Singles and young couples are often more drawn to areas with trendy bars, restaurants, and night clubs.

Older folks may be focused on access to medical and health facilities, and the ability to walk to shops rather than be forced to drive. Lower maintenance apartments rather than houses with gardens begin to appeal to older people.

And all these requirements results in a layering of prices. Those heading to the trendy bar areas are often renters, not yet on the housing ownership ladder. They may not be in the peak of earnings yet, so lower price may be a big factor in the location decision.

I find it fascinating to try and figure the demographic factors and drivers of property prices in different locations within any city I am looking at. As an investor I am always trying to understand these forces as they will help me focus on what is important in securing good value and avoiding mistakes.

For example, I have often wondered about Manhattan as a place to bring up children. I have way fewer concerns about this in London. If Manhattan is a less child friendly environment, then this suggests that maybe the demographic profile of potential tenants is skewed towards singles, couples rather than families. This in turn might lead me to invest in a different kind of property in that market. Perhaps one or two bedroom apartments will be a better investment than a three bedroom. Why? Because there are more singles and couples looking to rent than families looking for more bedrooms.

“They aren’t making any more of this…”

You probably heard this old saying when referring to beachfront land. But it applies equally to land in the inner cores of prime cities for the most part. There is no new land being created in Central London. Old areas may be changing use and density, but there’s no new dirt being laid down in cities like these. What you see is what you have got. As cities grow there are often increasing pressures on existing land resources that make land increasingly valuable. Recognising this, municipal authorities may dramatically increase the densities that existing land can be developed to.

That zone of low rise warehouses in the middle of the city suddenly becomes zoned for high rise offices, or apartments, hotels, shops. Owning land or space in such areas can be a path to significant wealth. But again, it is all about spotting the location. It’s about identifying the forces that might drive major changes in land use and land value. Patience may be needed, as these things can often take years to happen. But not necessarily so. I have seen situations where major changes have happened in a relatively short space of time and valuations have gone up dramatically.

The 1997 Asian financial crisis crushed property prices in many locations around Asia, nowhere more so than in Hong Kong. Average prices for all types of property fell by around 60% in the six years to 2003/2004. Around that time I started buying some older industrial floor space. I spent a couple of years accumulating space in a particular building. Why? Well we had a business idea for that space which has tuned out very well. But equally importantly, there were two or three nearby developments I reckoned would have a big positive impact on the building. And it was a pretty run-down old industrial building.

Firstly I reckoned changes in town planning and zoning rules were in the offing. Most of Hong Kong’s manufacturing industries have high-tailed it north across the border into China. It was abundantly clear to me that two things would be likely to happen. First, the authorities would gradually allow higher value commercial uses to occupy these industrial buildings. They would be occupied increasingly not by dirty chemical, textile and metal bashing workshops but by office type uses, design studios, wholesale, retail, art galleries, sales and marketing functions (for the factories now in China). All of which would be prepared and able to pay much higher rentals. The buildings would be gradually upgraded and common area facilities improved.

Second, there would be pressure to simply redevelop many of these buildings to much higher quality buildings with much higher value uses located there.

Third, there were advanced stage plans to construct a brand new underground rapid rail system to the district, linking this area to the Central Business District in a journey of about 10 minutes. Transport infrastructure like this can be a huge value add proposition. Of course, this would take some time to build, but property values began to reflect this new infrastructure very early in the construction process.

End result. The space bought for our little business is now selling for five to six times what we started paying for in back in 2005/2006. The business is great, but the real bucks have been made in the real estate.

To benefit from the full list of Peter’s Rules for Buying Real Estate – Lesson from the Trenches, buy your own one year subscription to The Churchouse Letter for only US$299, and in addition to 12 months of investment ideas and insight, you’ll get full access to all of our special reports.

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