Where are Australianproperty markets likely headed in 2018 and what are the implications for nest egg builders? Where should I invest ? And in what?
Having a senior position in one of Australia’s largest investment property groups, these are questions I regularly encounter at family gatherings and wider social occasions.
My first response, always, is don’t talk to me about residential. We don’t invest in residential and nor do any of the large institutions and super funds. The yields are too low and the holding and transaction costs too high. Many people have made a lot of money in ‘resi‘ over the last cycle but it’s been a capital appreciation play. The consensus is markets have peaked and valuations in this sector generally are susceptible to correction when interest rates rise.
So I restrict my comments to commercial property, indeed investment grade commercial property, which is the only sector in which we operate.
In terms of the big picture it’s generally agreed among industry professionals that commercial property markets will do even better 2018 than 2017 and we concur.
The strength and outlook of commercial property markets in Australia are underwritten by our strong population growth,one of the strongest in the OECD, and Australia’s world record economic growth performance of 104 quarters without a recession.
The biggest balancing factor in this positive picture is an extended period of low wages growth since the GFC.
The bottom line however is commercial office buildings in eastern seaboard capitals, lead by Sydney and Melbourne but also Brisbane have been, and continue to, be very attractive places to invest. The Charter Hall Direct Office Fund is an excellent vehicle for exposure to this asset class in these locations,-currently offering a 6% pa income stream, with total return including capital growth likely to be around 10% pa over then term of the fund.
A distinguishing feature of Charter Hall is ‘co-investing’. We invest the company’s own money alongside our investors in all our funds and, importantly, so too do our executives with their own private resources. This makes for 100% alignment with our investors’ interests.
We believe Industrial property market is another avenue of good returns going forward. The ‘Amazon’ or e-commerce effect’ has seen strong and increasing growth in this sector. 70% of demand over the last few years in the industrial sector, which also includes factories, food processing and traditional warehouses, is related to logistics. As a firm we are very active in this sector with a number of major facilities held within our Direct Industrial Fund No.4. One building is a Wool worths state of the art distribution centre in Dandenong Victoria,where the cost of the storage /packing systems alone exceeded $100m!
This fund is open to investors and currently has an income distribution of 6.5% p.a. plus the prospect of a total return of circa 10% p.a. including capital gain.
The low wage growth scenario referred to earlier has been a factor in Charter Hall launching a new themed property fund based on consumer staples. The fund invests in properties occupied by tenants with businesses with inelastic demand characteristics, i.e. business not generally subject to economic cycles, and includes convenience retail (Coles Express), food (small goods manufacturing and distribution)and hardware (Bunnings). This fund has an opening yield of nearly 7% and, again, an expectation of a total return over the life of the fund including capital growth of around 10% p.a.
In summary, follow the lead of big super funds, which generally hold between 8% and 15% of assets in investment grade commercial property. We are confident total returns of around 10% pa can be realized by investing in funds that feature the best of office, industrial and retail property. This is the basis of our direct property fund offerings to nest-egg builders and professional and private investors.