Trends to consider when choosing which property sector to invest in
The Australian property market is currently a popular investment option among many investors.
Are you looking to invest in property directly or invest via a professionally managed mortgage fund?
Here are some clear trends shaping the market that could influence your return on investment and exposure to risk.
What are the experts saying?
In February, the Reserve Bank of Australia (RBA) indicated that interest rates will be held at a record-low 0.1% until at least 2024. This timeframe has been met with what the RBA considers adequate time to adjust inflation and increase employment.
Optimists are outnumbering pessimists according to Westpac chief economist Bill Evans. He has predicted, alongside senior economist Matthew Hassan, a 15% national property price "surge" from now to 2023.
Property prices are at record highs and what feels like a stampede of first home buyers are taking out new mortgages. Influenced by low interest rates and government incentives, these people are buying houses at the fastest rate in more than a decade.
Residential sector showing further strength
Finishing 2020 on a high, the residential sector is showing further strength with both capital cities and key regional areas seeing property price growth.
According to CoreLogic's February Monthly Housing and Economic Chart Pack, there has been a record number of Australians moving from capital cities to regional areas.
Trilogy's head of lending and property assets, Clinton Arentz, says owner-occupier demand is outweighing property investors.
"Many key regional areas are performing the best they have in many years, with strong demand for house and land packages, prestige housing, as well as apartments and townhouses," he says.
"An anticipated infrastructure boom influenced by increased connectivity between communities and cities, and interstate and international migration, will play a significant role in economic recovery."
While positive market sentiment has offered investors a sigh of relief, there will be important economic factors to monitor. According to the RBA, the unemployment rate remains higher than it has been for the past two decades.
Industrial property in high demand
In light of the booming online shopping space, a demand for quality industrial assets has emerged in recent months with yield compression demonstrating more buyers than sellers.
As a result, leasing activity within the sector is at its highest level since early 2015 according to JLL. This presents an opportunity for investors seeking long-term, competitive investments with opportunity for capital value increase.
The industrial sector is also proving to be an attractive opportunity for developers. Despite near-record supply, elevated demand has supported the stability of the rental market creating an attractive prospect for new industrial projects.
Re-thinking commercial property
The pandemic has caused the commercial property sector's landscape to change considerably with new work practices coming into play.
The 20-minute neighbourhood concept has arisen, based on the idea that people are able to work comfortably from home, and can access all daily goods and services within their local area.
With that being said, asset classes, such as office buildings, are predicted to maintain their relevancy. Collaboration, training and cultural cohesion will redefine office spaces according to Knight Frank's 10 predictions for Australia's property market in 2021.
In the meantime, owners have become more flexible and are more willing to consider shorter leases, and arrangements for expansion and contraction. According to the Australian Financial Review, tenants in Sydney and Melbourne CBDs are getting better deals than they did before COVID-19.
Moving forward, the commercial property sector is likely to rely on overseas investors to drive sector recovery.
Retail sector in somewhat hiatus
In 2020, the retail sector was hit hard with a sharp increase in e-commerce impacting the efficiency of having multiple physical stores. Over recent months it has grown clearer that these circumstances are unlikely to favour businesses that don't choose to innovate.
To assist with market recovery, government restrictions have limited landlords' ability to default impaired tenants, with many more tenants expected to have renegotiated lower rental payments or terminated lease agreements.
According to Retail Property Operators in Australia's latest market research report, industry rental yields and vacancy rates are forecast to recover to pre-COVID-19 levels over the next five years. As a result, industry revenue is anticipated to grow at an annualised 3.6% over the five years through 2025-26.
Looking for a property-based investment opportunity?
For some, buying a house, unit or vacant land is a daunting process, and for others, direct investment in industrial, commercial or retail property is unattainable. The good news is, there are other options to get exposure to the property market than a direct purchase, such as investing via a professionally managed mortgage fund or property trust.
There are many different types of property-based funds to choose from which could help you diversify your investment mix by providing you exposure to a range of property assets.
As with all investments, there are risks as well as potential rewards associated with investing in property. A licensed financial adviser can help you better understand the pros and cons of different investment types. We always recommend investors obtain, read and understand the relevant offer documents and seek advice from a licensed financial adviser before investing.
This article has been prepared by Trilogy Funds Management Limited (Trilogy) ABN 59 080 383 679 AFSL 261425. This advice is general advice only and does not consider your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.