October 22, 2019 - Peak Equities
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With seismic political events sweeping the world, investors are increasingly seeking investment safe havens. Australia, one of the leading international markets for investment, is considered one of these havens offering continued growth, as well as diversified and defensive assets classes.
The economy has weathered several credit crises, regulatory changes and global financial movements. With a new wave of uncertainty and risk, can Australia push through unscathed or will the numerous geo-political and economic risks have a wider detrimental impact than they have historically.
As we move into the end of another year, political events dominate the headlines. This is likely to contribute to another round of risk aversion throughout the investment world. On one side of the Atlantic, the US seems to be encountering an increasing amount of political indifference both domestically and offshore.
On the other side, the UK’s Brexit headache continues to spiral. Across the Pacific, the Hong Kong democracy protest remains in the headlines and looks to be worsening. In all four of these political theatres – US Congress, UK Parliament, the EU Council, and Hong Kong – while there has been progress in recent weeks, resolutions are unclear adding to overall investor nervousness.
As we shift our focus to the domestic market, the Australian Reserve Bank delivered an October rate cut from 1% to 0.75%. Phillip Lowe stated this was to support sustainable growth in the economy, full employment and achievement of the inflation target over time. It is expected that there will be further easing of monetary policy going forward – supporting real estate capital values.
Just when the market believed that commercial property yields had reached their peak, the cost of debt and long term government bonds edged downwards over the past few months, further supporting pricing appreciation for commercial assets.
On the economic front, conditions appear positive albeit some downside risks remain. The residential housing market is recording momentum, and is expected to continue over the coming year. The recent rate cuts will likely augment the upward movements, which in tandem with tax cuts from the Morrison government, is likely to have a positive impact on household spending.
And while the labour market is under the spotlight at the moment, the 5.25% unemployment rate is considered healthy among developed economies globally. One of the concerns is the high household debt levels within Australia, as this is concentrated in residential mortgages.
While we are in unchartered interest rate territory currently, a rise would have a major impact on Australian households. However in the current climate this seems to be a distant outcome. NAB Business Confidence Index is also relatively subdued with a weakness in the retail sector and not surprisingly global uncertainty named as the main laggards.
So, with global market uncertainty at a high, what are the benefits of investing in Australia and how can the market safeguard your investment portfolio. Firstly, the 28 years of economic growth is a standout factor. With growth being a priority for investors, Australia does have one of the highest GDP growth rates compared to other developed countries. This, in conjunction with the relatively stable economic environment as outlined above, provides some security around income and capital preservation.
From an investment perspective, effective yields are still above those of many other developed countries. Australia typically offers a 4%-6% effective yield for prime A-grade office stock, while in Tokyo for example these would be more in line with 2%-3%.
Performance wise, the property sector in Australia has outperformed many global stocks and bonds over the short and long-term despite being the 14th largest economy in the world. According to the MSCI 5 year index (up to Q32018) Australia Direct Property recorded 11.7% unlevered return. The UK was the second best performing market recording 10.8%. Considering Australia’s size and position within the global hierarchy, this is a commendable result.
While performance is key, diversification is essential to de-risk a portfolio from market and cycle threats. Australia offers diversification via a wide range of markets, property types, and asset profiles opportunities. With a wide range of industries driving the economy, Australia could be perceived to be more insulated than countries that rely on singular streams of industry sector performance.
Top industries that buoy the economy are resource and resource related, financial and business services, education, technology and tourism. Traditional asset classes such as office and industrial have provided high returns over the past cycle. Alternate asset classes such as Health, Childcare, Student Accommodation and Build to Rent, are also recording a rise in investor interest.
As we have highlighted, global instability is far and wide in today’s markets. Under an environment of slow inflation, low growth, low interest rates, and rising volatility, investors will need to focus on protecting the durability of cash flows, and seek real estate sub-sectors or micro-locations that could outgrow the broader global economy.
We believe Australia has the fundamentals to provide this environment and continue to outperform most developed countries. With higher effective yields, stable economy and diverse opportunities on offer, we have confidence in the inherent defensive and diverse nature of Real Estate in Australia to remain attractive, regardless of exogenous global factors.
What is classified as a safe investment to one person might be considered unsafe to another. Overall, Australia has safe investments given recent economic events both locally and internationally. The Australian economy has weathered several credit crises, regulatory changes and global financial movements. Investment include shares, property, cash, bonds, and other more complicated investments.
Safe haven assets are usually set and forget investments which require very little maintenance throughout the term of the investment. Invests in cash and government bonds are typically safe haven assets, when the economy is performing well. However, this is not always the case and sometimes poor economic conditions can cause cash to deliver little to no return. Speak to your financial advisor to learn about the current safe haven assets.
Any investment can give high returns depending on the investor’s appetite and expectations. It is important that you are not driven to invest in assets with higher returns because such investments carry greater risk. The higher the return, the equally opposite lower return too. It is important to choose wisely, have a diversified portfolio to balance out negative conditions and to constantly understand why and how you are investing.
Real estate might be a safe investment to some and an unsafe investment to others. Real estate investments are not set and forget, unless you want to engage a property manager that will do everything for you at a cost. In order to maximise your returns, you will need to invest time and effort. This will help you manage your tenants appropriately, ensure there are fewer costs as possible and make the correct decisions to maximise your returns. Seek experts advise for real estate investing.
Getting Started in Commercial Real Estate Investing
Benefits of Investing in Commercial Real Estate
Understanding the Different Classes of Commercial Real Estate
Commercial Real Estate Investing in 2019
What is a Property Syndicate?
What You Need To Know Before Investing in Commercial Real Estate
September 19, 2019