Historically, headline yields of sub-5 per cent were considered low-yielding. But in this increasingly low interest rate world, a 5 per cent return can be relatively attractive. And with the full impact of the recent rate cuts likely to take some time to flow through, yields could compress even further from here.
Global volatility and a lower dollar
A search for yield is not the only factor supporting foreign investment in Australian property. The lower Australian dollar (AUD) makes Australian assets more affordable and there is also likely to be an element of diversification away from parts of Asia given concerns around the escalating trade war.
Much attention has been given in recent weeks to rising geopolitical tensions, particularly between the US and China. But these tensions are not new. They have been simmering at least since President Trump suggested he would implement significant tariffs on China during the 2016 election campaign. For most of that period there has likely been an element of investors, particularly in China, seeking to move money out of the country. This is likely to continue for as long as the US and China remain at loggerheads.
Another side effect of this global uncertainty and volatility is that ‘riskier’ currencies such as the AUD have come under considerable downward pressure. The relationship between the AUD and the USD gets the most attention but the AUD has also fallen significantly against many Asian currencies.
Over the past two years the AUD has fallen 10 per cent against the Chinese Yuan, nearly 15 per cent against the Singapore Dollar and nearly 20 per cent against the Japanese Yen. This will have worked to offset essentially all of the increase in capital values in Australia’s Office segment over the same time period, ensuring that foreign demand for Australian property remains solid.
What does that mean for investment decisions? As long as the Australian economy remains in reasonable shape, demand for property will continue. But as the low interest rate environment becomes increasingly entrenched, we will continue to see deals with lower yields than what we have been historically accustomed to.
Just as the Australian Prudential Regulation Authority has recently recognised that no one will have to pay 7.25 per cent on their mortgage, so too has the rate of investment return on property shifted down from years gone by.
Daniel Gradwell is Associate Director - Property at ANZ