We’ve all heard slick TV real estate agents coming out with the same tired old cliché advising us that ‘it’s all about location’ in order to make some kind of wise real estate decision. As if just by saying it, it makes them seem smart or clever. I doubt if they really even think about what they’re saying.
Of course, Knightsbridge is a ‘top location’ in central London, and would tick all the boxes for such an agent. But have you been there? It’s not actually anything special as far as being a pleasant place to live, which is why very few people actually live there full time (for example). It’s also possibly, due to that very same cliché, one of the most grossly overpriced places to live in the world. However, many ‘wise’ foreign investors did take heed to the ‘location location location’ myth, buying apartments in ‘the best location in the world’ – Number 1., Hyde Park.
How they could argue that the purchase could be any kind of ‘investment’, I do not know – where was their logic? Cash flow spreadsheets? Is 1% yield and a collapsing capital value a good ‘investment’?
Nicholas Shaxson, journalist and author of Treasure Islands: Tax Havens and the Men Who Stole the World agrees:
“One Hyde Park is like a pack of cards that can fall anytime, in the short term someone can imagine flipping their house for a profit but it’s crazy to expect a return on the property in the long run.”
Plainly these people are rich enough to not really care if they make money or not, but for the rest of us – when an old crone dribbles out those tired ‘L’ words, for your wallets sake, wake up and smell the coffee.
Let’s look at an example in USA of a ‘good location’ and a ‘bad location’ and compare returns these past 5 years.
1. ‘Good’ location – downtown Manhattan
Manhattan, like SW1 in London, is a classic ‘location’ play, and probably is what people think about when we think about location. It hasn’t actually been a bad place to invest compared to a lot of the ‘bubbled’ US locations either and has bucked the national trend.
But lets look at the history from the last 5 years.
The median Sales price in Manhattan has increased from around $1.1m to $1.1925 m in the past 5 years – a rise of 10.9%, according to real estate portal Trulia.
On a nationwide scale, that’s a pretty good result – median prices of existing houses across the nation fell from around $215,000 in 2007 to $175,000 (there’s a neat graph plus plenty of info here).
Rental yields are predictably low (typically sitting around 4.6% gross according to this) but lets put that aside for the time being – lets look at a ‘bad location’ and see how that compares.
2. ‘Bad location’ – Grant-Ferry, West Side, Buffalo
This area has historically been a working class, inner city, mainly Latino district, but over the past five years began to experience increased interest as it became the main focal point for Asian refugees coming to live in Buffalo. It could be described as a thoroughly ‘blue collar’ residential neighbourhood, where single unit houses on our website typically sell for around $30,000, and rent for $650 per month – well within the ‘affordable’ range (and a resulting gross yield of 26%).
Like Manhatten, prices have bucked the general American trend, according to Trulia. With Median sales prices increasing from $53,500 to $62,450 (or 16.7%) over the last 5 years.
Average Rent is $702, according to rental site Walkscore, which gives a 13.4% gross yield (this is substantially less than the properties on www.abbotsinchcapital.com, perhaps because a large number of units are in multi-unit properties.)
That apart, it’s fairly obvious that on both capital growth and rental yield scores, the ‘bad location’ wins hands down. Not only that, but a jump in interest rates could easily put the Manhattan property into negative cash flow territory.
In summary – Well, call me old fashioned, but numbers talk, and a growth of 16.7% vs. 10.9% and a gross yield of more than 3 times higher than Manhatten, can safely put the myth of ‘location location location’ to bed once and for all.
Author Alan W. Findlay is a Partner in Abbotsinch Capital with more than 15 years of experience in real estate investment. You can contact Alan to discuss investment opportunities in Buffalo via E-mail: firstname.lastname@example.org or by phone: +44 (0) 20 7193 2079.
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