AUI property outlook: Compelling case for commercial property; healthcare investments outperform
Good yields and stable values in the Australian property market.
The Australian property market is currently offering investors attractive yields and stable values, with the spread between property and Australian Government 10 year bonds at 310-550 basis points for prime assets, according to Australian Unity Investments (AUI).
“Overall, there is a case to consider investing in property now, given the widening yield differential and the continuing low interest rate environment,” says Ryan Banting, head of portfolio management at AUI.
“Property capital values have stabilised and yields are now back to longer-term averages.
“In this environment, we believe property represents a less volatile total return investment profile than other risk asset classes,” he says.
AUI’s latest commercial property market outlook found some property sectors performing better than others, with strong domestic and offshore investment demand for quality office property, and healthcare property delivering the highest returns.
“Low interest rates make office property investment compelling, while currency depreciation is encouraging foreign investors,” Mr Banting says.
“Many large foreign pension funds are increasing their allocation to direct property, with Australian office markets comparing favourably to foreign markets due to our higher yield, lower vacancy rates, greater transparency, and more recently our falling currency.”
The returns and outlook make the property market an attractive option for Australian investors as well.
“Subdued tenant demand is offset by low supply under construction, and highly occupied portfolios are continuing to perform well as most tenants are seeking to renew their existing leases at lease expiry,” Mr Banting says.
“Office property returns continue to trend around the long term average of 10 per cent, comprised of 7.5 to 8 per cent income and 2 to 2.5 per cent capital growth.”
AUI says healthcare continued to deliver the highest total returns of the property sector of between 8.6 per cent and 12.3 per cent (after fees) over one, three and five year periods to June 2013*. It also delivered the highest risk-adjusted returns of the property sector, over the seven-year period to 30 June 2013*.
Healthcare property also brings portfolio diversification benefits.
“Australia’s ageing population and greater incidence of disability underpin demand for healthcare services, and there is a strong correlation between age, disability and the requirement for healthcare services,” says Chris Smith, head of healthcare and retirement property at AUI.
“Non-cyclical demand for core medical services has protected the sector from external market shocks. Hospitals display a consistent performance profile and typically have long leases of 15-20 years. This insulates the income stream and provides capital value stability.
“The healthcare sector also has the lowest correlation with other property sectors, making it a desirable addition to a diversified property portfolio,” he says
In the retail space, AUI has found that property returns are generally softer due to weak growth in retail consumer sales.
Total income returns from industrial property have been consistent at 8.5 per cent (after fees) in the 12 months to 30 June 2012 and 30 June 2013*. AUI believes the medium term outlook is consistent with this level of return given subdued demand and little change in yields.
