Not only is property the largest asset class in the world, for many Australians it’s also the largest component of their household wealth. Indeed, of the top five people listed on the AFR’s 2018 Rich List, three have accumulated their wealth through property investment.
Part of the appeal of property has been that it has proven to be a great ‘store of value’ with prices rising over the long term, particularly residential property. But this is only half the story: a good quality property portfolio can also offer a steady income stream, particularly commercial property.
Now that the residential market has cooled, it’s worth taking a look at all your real estate investment options.
Residential properties such as apartments became popular with SMSF investors after regulations were relaxed in 2007 to allow investors to borrow through limited resource arrangements. Since this time, prices have risen strongly but the rents have not kept pace, resulting in poor income returns – often as low as 3% after costs. Now that prices have stopped rising strongly, many investors are questioning whether they should reweight their property exposure and want to understand their options.
Over the past 30 years, commercial property has delivered total returns of 9% a year. In general, about 2% of the total has been capital growth, with the remaining 7% in income, more than double standard term deposit rates, albeit with more risk.
The income is secured by leases to corporate and government tenants which typically run for 3-10 years, much longer than the average residential tenant. The predictability of this cashflow and the tendency for commercial property prices to keep up with inflation are the key reasons Australian institutions have been investing in this asset class for decades. These return characteristics also suit a lot of small investors; however, buying a city office building or suburban shopping centre is beyond the financial reach of most Australians. What’s more, these properties require a small army of professionals to run properly. For this reason, investing in commercial real estate is best done through a fund. A good fund will own a high-quality portfolio, with a number of properties in different markets and a broad mix of tenants making up the rent roll. For investors wanting security, it’s often best to look for a fund with low debt.
Some of Australia’s largest property owners, builders and developers are listed on the Australian Stock Exchange. The advantage of investing this way is that shares can readily be bought or sold on the market. The trade-off for this liquidity is that the price of the securities – and therefore the value of your investments – will move up or down almost continuously. In the long-run, things tend to even out but if volatile values are not your cup-of-tea, then an unlisted property fund might be a better option.
Taking a broader view, some of world’s largest and best property owners, builders and developers are listed on global stock exchanges including London, New York and Tokyo. It is through these portfolios, that you can get exposure to the evolving ‘new’ economy and how it intersects with secular trends in the underlying global real estate markets. For example, the growth of online shopping and e-commerce has led to an increasing need for logistics facilities.
The difficulty with this is that it is very difficult for a small investor to take advantage of these opportunities due to the enormous amount of research it takes to understand the dynamics of the global economy, the local real estate markets and the quality of the management teams running the assets. This makes investing via a fund a smart option.
In a low-interest rate environment, real estate can help investors seeking investments that deliver steady income to help meet food and energy costs, as well as other essential living expenses. But more than any other asset class, deciding to invest is only the beginning. How you invest is likely to play a big part in determining how much income you receive versus how much you’re relying on price rises.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.
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