Despite the great capital gains many homeowners have achieved in the last few years, it’s a brave investor who would now wade into the Sydney or Melbourne residential property markets with the sole aim of achieving an attractive return.
Sure, buy a house or apartment because that’s where you want to live. But if you are looking for a stable investment, looking further afield to investment grade commercial property is likely to be a better bet.
There is currently an explosion in apartment building in the major capital cities, and at the same time the RBA has warned against a housing bubble, the big banks have cut bank lending for international buyers of new Australian apartments.
Yields on residential property after generally very low, anything from around the 2 to 3 per cent after you take into account the holding costs including rates, services and land tax.
By comparison, an interest in investment grade commercial property through leading Australian investment property managers can be purchased via the stock exchange or through unlisted property trusts with the expectation of 6.5 to 7.5 per cent per annum plus capital growth, without any of the expenses associated with residential property.
Where does population growth fit in?
Population is a significant driver of economic growth. And economic growth is a driver of commercial property prices. According to the Australian Bureau of Statistics, the Australian economy grew at an annual pace of 3.2 per cent in the 1990s of which nearly half – or 1.5 per cent – was contributed by population growth.
In the first decade of the new millennium, Australian economic growth increased to around 4 per cent per annum, of which 1.8 per cent was attributed to population growth.
The International Monetary Fund population projections have Australia significantly above the US, the UK, China, Germany and Japan.
This may come as a surprise to the average Australian who tends to think we have a low population growth compared to many OECD countries, but we don’t.
Chart: Population growth
Source: Charter Hall Analysis of IMF WEO Oct-16 Data
The graph above shows our lead in the population stakes, and basically it is all good news. Increases in population fuel economic growth and economic growth in general is a major positive for property prices.
This is one of three factors which led many observers to believe the outlook for high quality commercial properties in Australia has a bright future in terms of income yields and capital growth.
The other factors are the relatively strong economic growth being experienced in the two key commercial property markets of Sydney and Melbourne, and finally, the subdued value of the Australian dollar, which makes Australian commercial property attractive to foreign buyers.
Nick Kelly, head of direct property, Charter Hall