You are here

Is the ‘halo effect’ a help or a hindrance for investors?

If you have a background in marketing or if you have just started to dig around in the world of property investment, you may have stumbled across the term, the ‘halo effect’.

The term can in fact have two very different meanings so I thought I would put the term into context for investors and explain how it can influence your investment decisions.

In a strictly marketing sense, the ‘halo effect’ can be used to describe the bias a customer shows towards certain products because of a favourable experience with that product or other products made by the same manufacturer or maker. Basically, the halo effect is driven by brand loyalty, bias or familiarity.

To show you what I mean, let’s try a little exercise. I am going to throw you a list of questions and you can only choose one answer to each question:

  • Ford or Holden?
  • Channel 9 or Channel 7?
  • Corona or Peroni?
  • West Coast Eagles or Collingwood?
  • Public or private education?

Whatever answer you choose (even if you are not very knowledgeable about the question) is likely to be driven by your own personal experiences and affiliations, or that of your friends and family. Often when people are not very knowledgeable on a subject, they tend to fall back on what they know and what is familiar.

Let’s try the same exercise from an investment perspective:

  • House or apartment?
  • New or established?
  • Eastern suburbs or western suburbs?
  • Positively geared or negatively geared?
  • Furnished or unfurnished?

This halo effect can be a trap for investors because rather than choosing an investment opportunity based on research and objectivity, people can often make decisions based on bias or pre-existing familiarity.

Investors may choose a house in a suburb because it is close to home or they are familiar with it, not because it will achieve the best returns. The same goes for choosing a house design or a builder. Investors often choose a house they want to live in, or build with a builder recommended by friends, not because they are the best builder for the job.

This definition of the halo effect also has the ability to cloud your judgement. If you already have a positive predisposition towards a property the halo effect will make you more likely to have a favourable bias towards all aspects of the property. If you like the look of a house you may start to convince yourself all tenants will too. You may not be able to view the property objectively and this can be a costly mistake. This is where the ‘halo effect’ in its very traditional sense can tend to let investors down.

The other definition of the ‘halo effect’ specific to property investment has been used to describe the way value tends to filter from thriving suburbs into the areas surrounding it, like a ‘halo’. Now this is a scenario that can provide plenty of positive opportunities for investors. Let me explain.

One of the most popular and frequently quoted phrases in property investment is ‘location, location, location’ and that is all good and well if you can afford to buy there. But just because you buy a house in a popular suburb does not mean it will provide you with the best possible return on investment.

The same goes for the phrase ‘buy the worst house on the best street’. Why would you want to do that? You will only be paying top dollar for a house in a street that may already be maxed out in terms of price growth and instead you should be looking for a house that is just on the cusp of a growth spurt.

The popular suburbs are usually pricey for a good reason. There is no harm looking for an investment property in an established suburb that has historically shown steady price growth but don’t be afraid to explore suburbs you are not familiar with.

Some of the newer estates and suburbs may not look that exciting now but if you manage to get your hands on the masterplan for the area, you will quickly recognise the area is destined for greatness. If an estate or suburb combines a few of the following features, chances are the area could experience strong price growth in the years ahead:

  • Close to the CBD or easy access to the city;
  • Close to shops and reputable schools;
  • Close to public transport or planned major infrastructure projects;
  • Carefully designed estate with strong planning principles;
  • Plenty of parks, walkways and bicycle networks;
  • Close to the beach, river or other attractive attributes;
  • Strong community and passive surveillance;
  • Developed by a reputable developer.

Unfortunately, often when you find one of these suburbs you aren’t the first person to do so and you will have to get in line behind everyone else lining up to buy a block and that is when the ‘halo effect’ can work to your advantage.

Don’t be afraid to look and see if there is potential for the value to filter into the surrounding suburbs. Often by broadening your search by a 10km radius you can save yourself upwards of $20,000 on a block of land but it is not compromised because it is still close enough to the train station, shops, schools or the beach. You may have made significant savings by looking further afield but it is likely to have minimal impact on your rental returns so you are already in front, just by working the halo effect to your advantage.

Late last year, the team at Investor Assist with the support of the ABN Group did just that. We released sixteen three-bedroom, two bathroom townhouses located in close proximity to a planned $80m train station in Perth’s southern suburbs. We chose a site that was just slightly on the periphery but was still close enough to the train station which enabled us to build and price the townhouses at an extremely attractive price point.

Astute investors snapped up all sixteen townhouses the weekend of release because they recognised the properties will attract a rental return on par with other properties closer to the train station but they didn’t need to pay as much to buy one so they were already in front.

I am not saying you should avoid the ‘hot spots’ as they are definitely where you want to be. All I am suggesting is that you shouldn’t be afraid to look just outside these hot spots for areas that have the potential to be influenced by the ‘halo effect’. Two of our recommended halo areas in WA at present are Alkimos in the northern suburbs and Atwell, south of Perth.

But there is no denying all the research and time needed to identify these ‘halo’ areas is not manageable for most investors. I always suggest that to truly understand an area, you need to apply the ‘100 rule’ which requires you to visit at least one hundred properties in an area to accurately identify an option that will meet your financial needs and investment objectives.

I am also a realist. Most investors would like to be able to benefit from the halo effect but don’t have the time and this is where I encourage you to work the industry to your advantage. Call on the industry experts including reputable builders, brokers, property managers and particularly investment brokers to do all the hard work for you. The best solution is if you can find all these services under one roof and if they are any good, they should be able to recommend what you should be buying, where and why.

Just remember, if you are considering an investment opportunity you want to make sure it is the property under the influence of the halo effect, not the investor. The financial implications of the wrong halo effect can be significant so make sure your halo effect is a help, not a hindrance. 

 

DISCLAIMER: This information is of a general nature only and does not constitute professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstances. Investor Assist Pty Ltd Builders Registration No. 13818.