The lay of the land - is property still a viable investment?
28 Nov 2019
Australians are known for having a strong attachment to real estate, with many of us investing a considerable portion of our wealth in residential property. For those who own, or are paying off a mortgage, our homes represent one of our most significant assets. But is the residential property market recovering and will property continue to provide a reasonable rate of return for investors?
Historical data shows that over most time horizons investment in bricks and mortar has been well rewarded, however, current research indicates that making the decision to invest in residential real estate is less straightforward than ever.
Like many markets, the residential property market tends to operate in a cycle, with commentators often referring to a ‘seven-year cycle’ to explain the price movement through the four phases of boom, bust, bottoming followed by recovery.
Australian capital cities are often at different stages of the residential property cycle, with Sydney and Melbourne typically leading other parts of the country. As you can see in the chart to the right, over the quarter to the end of October, all capital cities, with the exception of Perth and Darwin, have experienced a recovery after softening from their peak in March 2018.
All signs suggest recovery is underway, but dig a little deeper and it seems this trend may be isolated towards the high-end of the market, with the apartment market and less prestigious suburbs lagging. The graphic below shows some of the suburbs tipped by industry experts to enjoy above average returns throughout 2020.
Suburbs tipped to enjoy above average growth in the next 12 months
Economic indicators often provide insight into the state of the housing market, with factors such as household debt and borrowings, share price levels, building approvals and population growth cited as indicators of the health of the housing market. But this is never an exact science, and sometimes there is little correlation between these markers and median house price growth. An example of this is in Victoria where the economy is performing well and population growth is the strongest in Australia, yet the median house price has fallen 7.4% from its peak in March 2018.
Despite the weaker economic outlook and high levels of household debt, the outlook for national house prices for the next 12 months is positive for the first time since the first quarter of 2018. On average, property professionals now predict national house prices will grow 1.3% over the next 12 months, after having predicted a 12-month decline of -0.2% in the previous quarter.
For investors with longer investment horizons and first home buyers this is great news. For others still keen to consider the property sector but interested in more liquid, less hands-on options, there are alternatives to residential property which you may wish to consider and discuss with your adviser.
Listed and unlisted property trusts
Another way of investing in property is through a structure, such as a real estate investment trust (REIT) sometimes known as a listed property trust (LPT). These are companies that own, and in most cases operate, income-generating commercial real estate, such as office buildings, hospitals, shopping centres and industrial estates. There are many types of REITs available to investors with most tending to focus on a specific type of property, for example, retail or infrastructure REITs.
It’s likely you already have some exposure to REITs through your super, however, it’s also possible to invest in these companies individually, through an exchange-traded fund, or with a mutual fund.
Benefits of REITs:
- Diversification — REITs provide greater diversification by enabling investment in a large range of property sectors.
- Stability — the Australian market is extremely well established, highly regulated and transparent.
- Liquidity — unlike residential property, REITs are easy to sell quickly as they trade on the share market.
- Returns — the potential for superior returns, however, the volatility of the sector does not suit all risk profiles.
Alternatively, unlisted direct property funds offer investors an opportunity to participate in the broader property investment market through a syndicate, a pooled fund or similar managed products. These vehicles enable investors to access larger, more diversified and sophisticated assets, typically in the office, retail and industrial sectors.
Many Australians are often overly reliant on property. It’s important to ensure that your investment portfolio is well-diversified, suitable for your risk profile and not concentrated in any one asset class. If you have any questions, please contact us.
Super strategies for downsizers
If you do own property and are considering selling or downsizing, you may be able to pay a proportion of the sale proceeds into super to boost your retirement savings.
Making a downsizer contribution to super
If you’re 65 or over and are considering selling your home, you may be eligible to contribute up to $300,000 (or $600,000 combined for a couple) from the proceeds of the sale as a ‘downsizer contribution’ into your super.
Unlike making non-concessional contributions, you don’t need to be working and there are no age limits to making a downsizer contribution. Also, the total super balance test of $1.6 million and the $100,000 non-concessional contributions cap restrictions don’t apply, making it a great option if you want to contribute more to super and are currently ineligible.
The property must be located in Australia. It doesn’t need to be your current home — it can be your former home as long as you or your partner have owned it for more than 10 years and both of you lived in it at some point in your life. An investment property that neither of you have lived in is not eligible.
Alternatively, if you’re under 65 you can also make after-tax or non-concessional contributions, even if you’re not working. If your balance is less than $1.6 million as at June 30 of the previous financial year, you can make additional contributions to your super. If you exceed this balance cap and make a non-concessional contribution you will incur an excess contributions tax.
‘Bring forward’ contributions
You may also be able to bring forward two years additional non-concessional contributions meaning you can make a significant contribution in a single year up to $300,000. To be eligible your total super balance must be below $1.4 million as at 30 June of the previous financial year.There are a number of tax advantages of this strategy, including tax-free withdrawals in retirement and a maximum tax rate on investment earnings of 15% in the super environment, compared to the tax rates you pay on your income and investment earnings.
If you are interested in either of these strategies, please contact your financial adviser to discuss your particular circumstances.