In a global economy dominated by volatility – think Brexit, the slowdown in China’s growth rate and both domestic and foreign policy issues inside the United States – investors are likely to be attracted to more defensive investment strategies. Targeting income returns in real estate is one attractive option.
Income from real estate largely comes from rent, or if you have invested in a managed fund it mostly comes via regular distributions. At the moment, income returns are looking more attractive than pure yield plays.
When you look to markets around the globe, Australia and Japan, compared to some of their global counterparts, have typically offered more stable economic growth and low unemployment which in turn drive rental returns. We believe these conditions are set to continue.
The low unemployment rate, alongside high absorption rates, which measures how quickly buildings sell when on the market, are set to drive rental growth particularly in office markets.
When you look further into the Australian markets, the Sydney and Melbourne CBD, in particular, are seemingly primed for more solid income returns, where high infrastructure spending and lower taxes are forecast to deliver better total returns during the next three to five years.
There will also be counter cyclical opportunities in other states such as Queensland where several large infrastructure projects are on the drawing board and we expect to see further promises of spending in Queensland electorates in the run up to the federal election, which is expected in May. Any injection of capital would be a boost to that economy.
The industrial market in Sydney, while it is already sharply priced, we feel is also expected to deliver further rental growth momentum. Investors are also turning to alternatives such as real estate debt which can generate property-like returns.
Looking for income returns in a real estate portfolio is a sensible strategy, particularly in a volatile environment where capital growth is no longer a given. With a ‘lower for longer’ theme starting to play out, sound opportunities remain for investors to access steady income from core commercial real estate and alternatives.
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