Buying a holiday home as an investment property may seem like a good idea, however, the research proves otherwise.
The Current State-Of-Play
As interstate travel restrictions within each state around Australia slowly ease amid the COVID-19 pandemic, many have begun searching for short-term accommodation for their next travel adventure.
Until international borders open, local tourism spots are likely to be flooded with visitors.
This is promising news for investors with investment properties within these areas. However, it was only a few short weeks ago when these types of properties experienced extremely high vacancy rates due to the travel restrictions imposed by the state governments.
Regardless of the COVID-19 pandemic, high vacancy rates are quite common for owners of properties in tourism destinations due to the seasonality of the destinations.
Case Study: Batemans Bay, NSW.
Let's dissect a suburb located in one of Australia's favourite holiday destinations, Batemans Bay, in New South Wales.
I will tell you the exact reasons why properties located within tourism destinations may be a poor addition to an investment property portfolio.
About Batemans Bay
Batemans Bay is a popular tourist destination located approximately 225km south of Sydney and is known for its beaches, fresh seafood, and a myriad of water spots.
While Batemans Bay's landscape is picture-perfect, is it a good solid investment decision?
Let’s analyse some of the factors.
1. Seasonality.
When a tourism location is in the desired season for example a beach destination in summer and the ski slopes in winter, there is naturally an influx of visitors and the economy thrives.
Unfortunately, for many destinations around Australia, this peak period is only experienced for 2-4 months during the year. Due to this seasonal nature of these destinations, properties can sit vacant for a large period of time making it financially challenging to hold the property.
With the chance of the property sitting vacant, and therefore, providing zero cash flow for a portion of the year, it's classified a high-risk investment.
The Eurobodalla Shire, which includes Batemans Bay, experiences the most visitors during the summer months.
Between 2016-2017, almost 1.3 million domestic and international visitors travelled to Batemans Bay and the regions around it, with the majority of tourists in the summer months [1].
2. Employment.
Having a diverse and strong base of employment is essential for driving constant demand for property within a market.
While many tourism destinations have a diverse employment base, these are generally in supportive industries such as retail, accommodation, and food services. These industries are reliant on the number of people visiting and moving into an area.
This poses the risk of volatile market conditions and may harm the overall performance of an investment property located in the area.
If we analyse the industry of employment in Batemans Bay, it's unsurprising to observe the majority of employment comes for tourism-focused jobs.
While tourism is an important factor in a local economy, a growing economy requires other industries such as construction and education and health to help provide an area with jobs regardless of the season.
3. Home Ownership.
During a period of economic uncertainty, owner-occupiers are unmotivated to sell their property and are more likely to wait until conditions improve.
Investors need to purchase in markets dominated by homeowners; a market dominated by 70% or more home-owners are typically stable markets.
It's common for tourism locations to have a very high renter market. This is evident in Bateman Bay’s with 54% of all property being occupied by renters.
This represents a high-risk market and one that can dramatically fluctuate in price in an economic downturn as investors panic sell their properties.
Key Takeaways
In property, all investors should want the asset to provide the strongest return possible. This is achieved by adhering to a clear set of criteria to ensure a low-risk investment. It's clear that tourism locations very rarely fit into this criteria.
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James Allnutt – Property Investment Consultant
P: (02) 9939 3249
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