Dear Keith,

There are select and highly attractive opportunities in investing in lower-socioeconomic areas in inner cities undergoing gentrification. Picking these areas requires a great deal of skill and experience. More generally you need a higher rental yield to justify investing in lower-socio economic area. Firstly, tenant risks need to be more closely managed. Secondly, many of these areas are on urban fringes where there is no shortage of potential housing supply thus depressing capital growth potential. This is well illustrated by the Campbelltown area on Sydney’s south-western fringe. Thirdly, persons in lower socioeconomic status bands have and continue to experience lower income growth than persons in higher socioeconomic status bands, particularly the highest band. For example the lowest 20% band over the last 12 years to 2011/2012 experienced income growth of 3.6% pa versus 4.4% pa for the highest band. Income growth is closely tied to rising housing affordability and capital growth. A difference of 3.6% pa versus 4.4% pa may not sound like a big deal but over a long investment horizon this translates into a very big difference in the value of your investment.

At Steppingstone Property we consider potential gentrification closely when advising clients. If for example an area with residents in lower income bands gentrifies over 10 years into a higher income area this can lead to average income levels rising by over 6% pa. This sort of rise in average income leads to very successful property investment.

• This reply was modified 10 years, 4 months ago by  Simon Romijn | Stepping Stone ™.