Among the many financial services we provide to clients in the Perth area is helping to diversify their portfolios. Property investment is one way to diversify. Recently Michael Kingcott, Head of Property Investment Strategy and Research for our parent company, AMP Capital, took a look at how the “chase for yield” is affecting property returns. We would like to provide you with some highlights. (1)
During a period of low interest rates, Australian investors and foreign investors are choosing to invest in commercial real estate. Because yields on bonds tend to be low, investors are searching for a “safe” investment that provides higher yields. Currently, investors searching for a high-yield, low-risk investment are attracted to commercial real estate. (1)
However, yields have compressed during the last decade from a high of 8.7% just before the Global Financial Crisis (GFC) to their current level of 6.6%. Mr Kingcott expects yields to fall even further, matching their 2007 peaks. Some assets may see rates even lower than their 2007 peaks, such as investments with secure high yield, markets with rising prospects for rental growth and trophy assets. (2)
Mr Kingcott is of the opinion that investors will continue to chase yield until other prospects look better to them. This would include rising interest rates, steady momentum for global economic growth and some relief from share market volatility. He feels that the following circumstances will produce from 12-18 more months of yield chase. (1)
Australia has a “tepid” outlook for short-term economic growth. Forecasts from both the Reserve Bank of Australia (RBA) and AMP Capital call for short-term growth in the Gross Domestic Product (GDP) of 2-2.5% per annum. (1)
Real estate prices look more attractive to investors than other asset classes due to less volatility. It is preferred by many investors who are looking for shelter from a high volatility, low growth environment. (1)
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(1) AMP Capital, Michael Kingcott. 19 February 2016. “Chase for yield pushes property returns higher.”
(2) JLL Research, AMP Capital (forecasts).