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Paint the town rent

by Ben Power | 02 Jan 2013

Property is the major source of retirees’ wealth. Australia’s over-65s hold some $349 billion of home equity wealth. More than 72 per cent of over-65s own their own homes, and those homes represent more than 75 per cent of their total personal wealth.

But the past two years have been dismal for Australian property as population expansion slowed, interest rates rose (up until recently) and weak income growth led to a lack of confidence from purchasers who were no longer willing to pay as much for their properties.

Role reversal

A report by ANZ, ‘Asset Returns: Past, Present and Future’, found the average annual residential property return for the next decade is likely to sit close to 4.5 per cent. The same report forecasts returns from equities to be just under eight per cent, a complete reversal of the report’s data for the past 24 years, which found residential property to be the clear winner.

But within that gloomy picture, there are pockets of opportunity and resilience. BIS Shrapnel’s Zigomanis sees most potential in NSW, Qld and WA, explaining that the housing market in Sydney and surrounds has tight supply, while the mining boom will flow through to house prices in WA and Qld.

So if property returns are forecast to be relatively low in the future and investors have to handle ongoing costs and lots of management time, one of the few benefits of property as an asset class is stability.

“Property is an asset class that a lot of Australians feel comfortable with and it’s less volatile than the share market,” says financial adviser and author Jason Cunningham. “At the end of the day, property can always be utilised, we’re always going to live in houses.”

Falling prices are also not necessarily bad news for everyone. Retirees looking to generate income streams from investment properties will benefit from lower purchase prices because rental yields will be higher. A property bought for $100,000 that rents for $8000, for example, has an eight per cent yield. But, if it is purchased for only $80,000, the yield is 10 per cent. Zigomanis expects yields to keep rising and remain relatively high. 

Commercial investment

Some retirees are also turning to commercial property as an alternative. The ANZ report forecasts returns from commercial property over the next decade of six per cent, higher than the 4.5 per cent forecast for residential properties. On a risk-adjusted basis (which takes into account volatility) expected returns from commercial property are roughly in line with equities.

There are a number of benefits to commercial property: the yield is higher, the tenant pays most of the upkeep of the property, and tenants usually stay longer. Commercial property can be accessed through direct holdings, real estate investment trusts (REITs) and property syndicates.

But there are also risks in direct commercial property holdings. The longer tenancy periods of commercial property can be a double-edged sword. “You get a tenant in for significantly longer but the periods of vacancy are also so much longer,” Cunningham said.

“Many businesses are doing it tough at the moment, and with the new technology age there are so many businesses starting up that do not require an office, so there may not be the demand for commercial premises.”

For retirees not interested in direct ownership of commercial property, REITs, which have a diversified portfolio and are often listed on the ASX, are an attractive alternative.

One issue retirees need to be aware of is to ensure their portfolio is not overweighted in property. Cunningham suggests a retiree’s portfolio should only be comprised of 50 per cent to 60 per cent property, at the very most.

“One of the dangers with an investment in property is that it is much less liquid than that in the share market,” he said.

“If you need to realise that asset for some cash, for example needing to live off that investment, it can take you up to 150 days to get that money." 

But property still remains a relatively stable asset class amid extreme share market volatility. “Those with equity in their pockets who are worried about a volatile share market may very well find themselves investing in residential property,” Zigomanis said.