Capital cities vs regional towns – what makes a better investment?

Wednesday, 3rd May 2017

It’s a common question among property investors, what makes a better investment destination, capital cities or regional towns? The answer may not be as clear-cut as you think.

When it comes to choosing an investment destination, many investors will consider both capital cities and regional towns, comparing the two to determine which location would deliver better returns.

To put it simply, the large majority of investors should invest in capital cities, however regional towns may be a good option for a very small percentage of investors.

Why are capital cities better for most investors?

Let’s start by looking at why the large majority of investors should focus on capital cities.

These locations make a better investment option because they typically have stronger population growth and more diversified economies, which helps to underpin property price growth and doesn’t make them as volatile.

You only have to look at the population figures to see this.

According to the latest Australian Bureau of Statistics, 276,400 people were added to Australia’s capital cities in financial year 2015/16, a 1.7% rise. This is compared to just 61,000 people who were added outside the nation’s capitals, which is a 0.8% rise – less than half the rate rise of our capital cities.

People are increasingly moving to capital cities as these locations are where they want to study, work and live because they offer more career and education opportunities and amenities.

While this continued population growth helps to underpin property prices, capital cities also offer more diversified economies, which make them more resilient during economic shifts and changes.

Take a regional town, for example. Typically these will be reliant on just one or two industries, such as tourism, mining, farming, fishing or manufacturing.

If a town’s economy is heavily reliant on just one industry, and this industry hits an economic downturn, then the town’s overall economy will slow significantly.

In a capital city however, the impact of one industry faltering will be cushioned as there are other industries to help support the local economy.

It’s these reasons that make regional towns inherently riskier as an investment destination.

When should regional towns be considered?

So if the large majority of investors should focus on capital cities, then who are the very small percentage of investors that should consider regional towns?

These are typically established, sophisticated investors who have already built a large property portfolio by investing in capital cities and are comfortable buying an investment property in a regional town.

While regional towns are inherently riskier, they can also deliver greater rewards. If a regional town’s single economy booms, then this can cause property prices to spike.

However, if the predominant industry in a regional town hits economic headwinds, property prices can drop sharply and investors can end up in financial distress.

Established, sophisticated investors are typically in a much stronger position to take on more risk and buy in regional areas. However this strategy is often more speculative and needs to be considered with care.

Every investor’s plan is different, and there is no one-size-fits-all strategy for property investment so it’s imperative to seek advice from a reputable property investment advisor or buyer’s agent as to the right approach.