Property Assets

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GUEST OBSERVER
New statistics showing one third of older Australians in low income households are ‘asset rich’ and ‘income poor’ demonstrate the need for new policies that will help them unlock their home equity in retirement. 
Data from the Australian Bureau of Statistics concludes one third of older low income households have less than $5000 in cash and other liquid assets, with nearly their entire wealth locked up in the family home. 
A typical older Australian will have $600,000 in property assets but will be living day-to day on a fixed income. 
We need to put in place the right policies that help older Australians downsize. All too often, a pensioner considers downsizing only to reject it because it would mean a hit on their pension. 
Many older Australians have a desire to move to more age appropriate accommodation, like a retirement village apartment or villa, but will be hit with a reduction in their income despite owning exactly the same amount of assets if they make the move. 
The reasons for downsizing are often health related – wanting homes without steps, or big backyards to maintain, and lower rates and utility costs. 
It makes little sense, both from an economic and a health and wellbeing perspective, to trap older people in large and often unsuitable family homes, with little money available to spend. 
The Property Council is proposing an adjustment be made to the means test, to exempt some proceeds from the sale of the family home by full-rate age pensioners aged over 75. The cost to the Budget is minimal. 
This type of targeted reform that removes the current disincentive to downsize will benefit income poor pensioners, as well as make the pension system fairer and more sustainable.
Mary Wood is executive director, Retirement, Property Council of Australia and can be contacted <a href="https://www.propertycouncil.com.au" target="_blank">here</a>.
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ABS figures prove need for downsizing help for seniors: PCA's Mary Wood

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<div>Dwelling prices steadied in the first quarter of 2016. </div>
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<div><img src="/images/2016/07/04/B4.jpg" alt=""></div>
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<div>With share markets also down a notch in the first quarter, total household net worth ticked down marginally to $8,64 trillion. It was the first such quarterly decline since September 2011.</div>
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<div>Australians have about $4 trillion in net worth or equity tied up in housing. Sounds like a lot, but then in the UK - where there is no compulsory superannuation - the share of housing wealth has been tracking at close to two thirds of total household net worth according to the Office for National Statistics. </div>
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<div>Australia's average net worth per capital therefore ticked to just a notch below $360,000, which is still exceptionally strong. </div>
<a href="/images/2016/07/04/B2.jpg" target="_blank"> Click to enlarge</a>
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 Gearing measures
On the matter of housing affordability, the interest payable to income ratio increased for a second successive quarter, although it remains 37 per cent below its 2008 peak. 
<a href="/images/2016/07/04/B3.jpg" target="_blank">Click to enlarge </a>
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<div class="separator">Gearing ratios ticked a bit higher, both for mortgage debt to housing assets (28.6 per cent) and for debt to assets (20.5 per cent).</div>
<a href="/images/2016/07/04/B5-1.jpg" target="_blank">Click to enlarge</a>
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<div>Overall, Q1 was a soft quarter for household net worth.</div>
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<div>However, CoreLogic reported today that both Sydney houses (+6.8 percent) and apartments (+6.7 percent) surged in value in the June quarter, so household net worth will no doubt increase again in Q2.</div>
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<div>Houses and units across the eight capital cities grew by +3.8 percent and +3.7 percent in the June quarter respectively. </div>
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PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>. 
His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.
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Record household wealth takes a breather: Pete Wargent

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Australian companies could increase their workforce potential by utilising their real estate assets, says a JLL report.
The report, Australian CRE (Corporate Real Estate) Survey – Getting the Strategy Right, identifies opportunities for real estate teams working in corporate Australia to shift their focus from real estate metrics to business performance goals.
“It is being recognised that a big factor of business success is the workplace, which contributes to talent attraction and retention and productivity," said Tony Wyllie, JLL’s Australian head of corporate solutions integrated portfolio services.
“Our latest JLL survey has found that when it comes to the expectations that are placed on internal teams managing real estate in corporate companies, they continue to walk a tightrope between delivering cost savings for the business and creating value from real estate assets owned by the company.
“There’s a real opportunity for these real estate teams to shift the conversation from cost to business strategy, focusing on outcomes like productivity that will create real value for the organisation,” he said.
The survey found that 88% of respondents reported productivity gains are still behind achieved predominantly by cost savings, but workplace improvements also rated highly in the survey, with 72% of respondents saying productivity gains had been made this way.
JLL’s third report on Global Corporate Real Estate Trends tracks insights from 544 CRE executives in 36 countries. The report shares the views of real estate teams operating in corporate Australia.
The major shifts in CRE sentiment since the last JLL global survey in 2012 are:
<ul>
<li>The CRE mandate is stronger than 3 years ago – 26% rated it much stronger and 40% said it was stronger</li>
<li>
Over the past 2 years, the majority of CRE (56%) say that their strategy has been more cost driven compared with 42% who say it has been more value driven
</li>
<li>77% of respondents said that over the past 2 years, productivity had become a more important goal for the CRE team.</li>
</ul>
The last three biennial global surveys conducted since 2010 indicate a clear focus on cost for corporate real estate teams at the expense of allowing these teams to create value beyond just financial savings.
“Internal real estate teams need to move from being a technical specialist to being a trusted advisor," Wyllie said.
“For corporate real estate teams to elevate their role away from just a cost focus, they need to expose what they have traditionally held as their organisation’s ‘strategically sensitive’ functions around portfolio strategy to service providers and shift their own focus on the pinnacle levels of strategy such as stakeholder management and integration with the key supporting business functions of HR, IT and finance.
“The results from JLL’s latest survey show that the demands from the C-suite (CEO’s, COO’s, CFO’s) are growing, not slowing.
“Since the GFC, companies have been honing in on what is typically either their second or third largest cost base – their real estate or office footprint.
“Not only has the C-suite continued to demand cost savings from real estate but their expectation is for corporate real estate teams to deliver on both the value and cost side of the real estate equation.
“That’s why corporate real estate teams are still walking a tightrope,” said Wyllie.
The report identifies opportunities for corporate real estate teams to shift their focus and increase their visibility in managing a company’s real estate assets. The survey found the CRE mandate to do this was stronger than 3 years ago – 26% said it was ‘much stronger’ and 40% said it was ‘stronger’.
“While the survey showed that the majority of CRE executives believe they can elevate their function through delivering cost savings (35%) and have spent the past two years with a strategy focused on cost savings, this succeeds in garnering support from the business, but leaves a lot of value on the table that companies could be using to maximise the performance of the business,” said Wyllie.
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JLL survey suggests real estate teams in Australian companies should shift focus to business strategy 

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BRW Rich Lister Shaun Bonétt’s Precision Group is selling a 50 per cent stake worth a $400 million in two prized CBD retail assets.
He is divesting the stakes from Adelaide Central Plaza in Adelaide and MacArthur Central in Brisbane, which has iPhone-maker Apple’s largest store in Australia.
Bonett appointed JLL’s head of Retail Investments – Australasia, Simon Rooney, for the stake sale.
According to JLL Research, both the shopping centres are in a select group of just 12 Australian CBD shopping centres of more than 15,000 square metres in size nationally.
Bonétt founded the Precision Group in 1994. It has owned Adelaide Central Plaza since its development in 2000 and MacArthur Central for the past 10 years.
His team, headed by ex-Westfield and Woolworths senior executive Trevor Dill, has developed the centres. Along with Apple, the mall has a Woolworths supermarket and Big W. The 15,085-square-metre centre has 39 specialty shops.
The 27,801-square-metre Adelaide Central Plaza is a luxury shopping complex, anchored by a strong-performing 22,922 sq m David Jones department store, plus a Tiffany &amp; Co and Pandora and 44 specialty shops.
The centre also has the potential for further development of a residential tower above it.
Rooney said the plaza was at the centre of Adelaide's "super-prime" retail precinct, positioned to attract international retailers.
"Investors remain very attracted to major Australian CBD retail assets for their defensive nature and strong-income-growth, value-add profile," Rooney said.
"The drivers of CBD retail trade continue to remain strong and are being fuelled by booming international tourism and the steady inflow of international retailers.
"There is now significant potential for owners to capitalise on this increasing demand for limited prime CBD retail space from new and existing international retailers, each trying to establish and grow in the Australian market."
As for the Brisbane asset, Rooney said that MacArthur Central would benefit from a surge in population as apartment supply in inner-Brisbane is expected to peak in 2021 with the opening of Australia largest casino resort and a dramatic increase in the amount of student accommodation.
"Growth in the resident population will further broaden the demand for different retail categories, such as groceries, household goods and services," he said.
“The upswing in tourism in Queensland will drive demand for discretionary retail such as fashion and food and beverage.” 
According to Tourism Research Australia, international tourist arrivals to Queensland grew by 9.7% in FY16.
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BRW Rich Lister Shaun Bonett to sell off $400 million stake in CBD retail assets

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The NSW government is set to sell its former Motor Registry site in Sydney’s Inner West suburb of Five Dock, just 7 km west of the Sydney CBD.
The state government is going ahead with the divestment as the former Motor Registry was made redundant with the rollout of the new format NSW Service Centres.
Located at <a href="https://www.commercialrealestate.com.au/property/1-ramsay-road-five-dock-nsw-2046-2013833921" target="_blank">1 Ramsay Road</a>, the 1,970.7 sqm site comprises a large corner parcel of land, which is highly accessible to both public transport and road infrastructure with development potential subject to council regulation.
The existing two-storey brick building has a net lettable area of 372 sqm.
The site has an 8.5 metre height limit, allowing for a prestigious development.
The listing agents are Neil Cooke, Stuart Cox and Johnathon Broome of Savills Australia. The site is being sold through tenders.
The property is currently leased to WestConnex for use as office accommodation and parking for a three-year term expiring in 201-end at a rental of $150,000 per annum net plus GST.
“1 Ramsay Road, Five Dock represents a unique opportunity to acquire a rare Inner West parcel of improved level land with excellent development upside (STCA) situated within close proximity to the Sydney CBD, local retail and transport amenities,” said Cooke. 
For buyers wishing to redevelop the site in the short term, the lease in place includes a three-month break clause.
Five Dock offers a cosmopolitan lifestyle with an abundance of parks, foreshores and cafes. Birkenhead Point Outlet Centre, University of Technology Sydney, University of Sydney are also near.
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NSW government to sell site in Sydney’s Inner West: Savills

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When most people think of investment property they think of residential, commercial or industrial property, but there are many sub-sets of these in almost unlimited geographic locations, so choice can be difficult. There are a range of metrics like population and economic activity that influence different property types and geographic areas impacting rental yields and growth potential, all adding to the complexity of choosing a good investment property.
Alternative property assets, which are sometimes categorised as thematic, can be a combination of interests in the land and/or improvements to the land and can include agriculture or farmland, land zoned for future use (eg residential), property allocated for specific uses such as renewable energy, affordable housing, logistics, social infrastructure, leisure and tourism etc. Investors can own land on its own, land plus improvements, or lease the land and own the improvements.
Alternative property assets are a viable option given values for residential and commercial property have been rising for some time, and retail is under pressure. There are always opportunities in alternative property, we just have to find them, and then find a way to participate in them. Due diligence is paramount to understand the merits of the opportunity, in other words the business model and the financial attributes.
How can you invest in alternative investment properties?
Without a large capital base or at the very least a substantial debt, it’s difficult to invest direct, and even if you have a large capital base, why would you put all your money into one property?
There are options where you don’t have to invest in a physical property such as A-REITs and Unlisted Property Trusts, but they don’t always reflect the pure performance of property (rent and capital growth) and they offer little or no choice to the investor.
This is where crowdfunding can add value.
Crowdfunding is a modern form of syndication. It lets you choose a variety of property investment opportunities thereby diversifying across property types and geographic locations, and engages independent due diligence. In other words, you can diversify property investment in much the same way as you diversify share investments across different companies and industry sectors, which is the best form of risk mitigation.
DomaCom is a company that has created a crowdfunding platform that can acquire any property for sale in Australia for any number of investors. You can join a public campaign to acquire units in a sub-fund linked to a specific property of your choice or you can club together with family and friends to acquire a property. Each investor receives units in the sub-fund in proportion to their individual investment. Each sub-fund has a term to expiry, usually 5 years, which guarantees an exit strategy or investors can sell their units online at any time, provided buyers exist. These may be other unit holders or new investors looking to share in the rental income and capital growth.
To read more about DomaCom <a href="https://www.domacom.com.au/" target="_blank">click here</a>.
 
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The case for alternative property assets: DomaCom

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GUEST OBSERVER
The low interest rates of recent times along with periodic turmoil in investment markets has provided us with a reminder of the importance of the income (cash) flow or yield an investment provides.
It’s particularly important for those relying on investment income to fund their living expenses. As with all investment topics, investing for income can seem complicated and daunting once you move beyond bank deposits but in fact it’s really quite simple. So this note looks at five charts I find useful in understanding investing for income or yield.
Chart #1 There are lots of alternatives to bank deposits
The yield an investment provides is basically its annual cash flow divided by the value of the investment.
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<li>
For bank deposits, the yield is simply the interest rate, eg bank 1-year term deposit rates in Australia are about 2.25% and so this is the cash flow they will yield in the year ahead.
</li>
<li>
For ten-year Australian Government bonds, annual cash payments on the bonds (coupons) relative to the current price of the bonds provides a yield of 2.8% right now.
</li>
<li>
For corporate debt, it’s a margin above government bond yields and depends on the riskiness of the company but is currently averaging around 3.6% in Australia.
</li>
<li>
For residential property, the yield is the annual value of rents as a percentage of the value of the property. On average in Australian capital cities it is about 3.9% for apartments and around 2.5% for houses. After allowing for costs, net rental yields are about 2 percentage points lower.
</li>
<li>
For unlisted commercial property, yields are around 5.5%. For infrastructure investment it averages around 4.5%.
</li>
<li>For a basket of Australian shares represented by the ASX 200 index, annual dividend payments are running around 4.3% of the value of the shares. Once franking credits are allowed for, this pushes up to around 5.7%.</li>
</ul>
The next chart shows the yield available on a range of investments both now and in December 2009. 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/10/24/Chart1.jpg" alt="">
Key messages: first, there are plenty of alternatives to cash when it comes to yield or income. Second, the yields on these investments will move over time and since the aftermath of the Global Financial Crisis (GFC) the trend has been down.
Of course investors need to allow for risk. Bank deposits have close to zero risk but any move to higher-yielding investments does entail taking on risk. More on this later.
Chart #2 The gap between yields on different assets relative to historic norms provides a guide to value
The next chart shows average yields on Australian shares and unlisted commercial property relative to the one-year term deposit rate since 2000. While yields have fallen, the gap between share and property yields and the bank deposit rate is extreme historically, with neither share or property yields plunging to the degree bank deposit rates have. In fact, the share yield is in its historic range. All things equal, this suggests commercial property and Australian shares continue to provide better value. The same would apply to unlisted infrastructure. 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/10/24/Chart2.jpg" alt="">
Key message: comparing yields provides a guide to relative value and right now shares and unlisted commercial property remain very attractive relative to bank deposits. 
Chart #3 Shares can provide stronger growth in income with less volatility than bank deposits
Investing in shares of course entails the risk of capital loss. But it can offer a higher and less volatile income flow over time. The next chart is a bit heavy but it compares initial $100,000 investments in Australian shares and one-year term deposits in December 1979 and the income they have provided over time (before franking credits are allowed for in the case of shares). 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/10/24/Chart3.jpg" alt="">
The term deposit would still be worth $100,000 (red line) and last year would have paid roughly $2450 in interest (red bars). By contrast the $100,000 invested in shares would have grown to $1.12 million (blue line) by end 2016 and last year would have paid $51,323 in dividends before franking credits (blue bars). The point is that dividends tend to grow over time (because profits and hence an investment in shares tends to rise in value) and are relatively stable compared to income from bank deposits, which vary with interest rate settings. Over the period the worst decline in dividend income from shares was a 32% decline between 2009 and 2011, whereas the income from bank deposits plunged 68% between 1990 and 1994 and by 60% between 2011 and last year. Once franking credits are allowed for, the comparison would become even more favourable towards shares.
Key message: while shares come with the risk of capital loss, a well-diversified portfolio of Australian shares can provide stronger growth in income with less volatility in that income than bank term deposits. Investors focussed on income need to decide what is most important: stability in the value of their investment or a higher, more sustainable income flow. The key when investing in shares for income is to have a well-diversified portfolio. Or better still a well-diversified portfolio of shares paying high and sustainable dividend yields. Finding high dividend yields is easy but the key is to look for stocks that have a reliable track record of growing those dividends and that have dividends that are not threatened by things like excessive gearing.
Chart #4 A bird in the hand is worth two in the bush
A high and sustainable starting point yield provides some security during volatile times. Since 1900, dividends (prior to allowing for franking credits) have provided just over half of the 11.8% average annual return from Australian shares and as can be seen in the next chart their contribution has been stable in contrast to the capital value of shares. 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/10/24/Chart4.jpg" alt="">
 
Dividends are relatively smooth over time because most companies hate having to cut them as they know it annoys shareholders so they prefer to keep them sustainable.
Key message: a high and sustainable income yield for an investment provides some security during volatile times. It’s a bit like a down payment on future returns.
Chart 5 Yield provides a guide to future returns
The yield an investment provides forms the building block for its total return, which is essentially determined by the following: total return = yield + capital growth.
As a general principle, the higher the yield an investor invests at, the higher the return their investment will likely provide. This is self-evident in the case of bank deposits because the yield is the return (assuming the bank does not default on its deposits – which is very unlikely in Australia given Government protections). It can be seen in relation to bonds in the next chart, which shows a scatter plot of Australian ten-year bond yields since 1950 (along the horizontal axis) against subsequent ten-year bond returns based on the Composite All Maturities Bond
Index (vertical axis). Over short term periods, bond prices can move up and down and so influence short-term returns, but over the medium term the main driver of the return a bond investor will get is what bond yields were when they invested. If the yield on a ten-year bond is 5%, then if you hold the bond to maturity your return will be 5%. Of course a portfolio of bonds will reflect a range of maturities and so the relationship is not perfect, but it can be seen in the next chart that the higher the starting point bond yield, the higher the subsequent return. 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/10/24/Chart5.jpg" alt="">
Put simply when bond yields are high they drive high bond returns over the medium term and vice versa. For example, when Australian ten-year bond yields in January 1982 were 15.2% it’s not surprising that returns from bonds over the subsequent ten years were 15.4% per annum. Similarly, when bond yields were just 3.1% in January 1950, it’s no surprise that returns from bonds over the next ten years were 3.1%. At 2.8% now, we are off the bottom of the chart meaning record low bond returns for the next decade.
Similar albeit less perfect relationships exist for other asset classes – the higher the yield, the higher the subsequent return.
Of course there are some risks investors must watch out for. At the individual share level, a very high dividend yield may be a sign of a “value trap” – where current profits and dividends may be fine but there is an impending threat to the company and so the share price is low. Second, high distributions may also be unsustainable if they are being paid for out of debt and reflect excessive gearing or high risk investments (eg, sub-prime mortgages prior to the GFC). Just remember that there is no free lunch.
Key message: while returns have been solid lately, low investment yields do warn of lower returns ahead – most notably from government bonds.
<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.
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