Home owners and landlords aren’t the only ones enjoying the boom in property prices.
Investors in real estate investment trusts (REITs), which used to be called listed property trusts until the rout inflicted by the global financial crisis prompted a name change, have been doing even better. Needless to say REITs are not to be confused with mortgage trusts which are a sad story.
Few properties I daresay would have returned 23 per cent annually over the past three years but REITs did, according to the ASX’s REITs index.
Just think, that was without the hassles of a temperamental toilet, a strata bill to fix concrete cancer, tenants trashing the place or a body corporate complaining about – not that it’s personal of course – you.
And if you need some cash or want to take some profits you just unload some of your holding.
Can’t sell the backyard to fund the next holiday, can you?
All right, so you guessed property doesn’t really do it for me but you have to admit I might be on to something.
Did I mention REITs are yielding around 6 per cent after fees? There can’t be many investment properties which could boast that or we would have heard about them.
Venture past housing and there’s the Cromwell Property Group which pays a quarterly distribution and yields 7.8 per cent, its price marked down because it’s in the unfashionable office sector and has a debt ratio higher than the norm.
The other thing about REITs is that they give you instant diversification. They come in four flavours for a start – residential (such as Mirvac and Stockland), retailing (led by Scentre Group), office (Investa) and industrial (Goodman) – but more to the point, they include a portfolio of properties. In Westfield’s case you even get a crack at shopping malls in the US where the economy is picking up as Australia winds down.
REITs were mauled in the financial crisis for over borrowing to invest in the very places where it hit hardest: the US and Europe. So decimated were they that only 17 are still standing. Sorry, 16 – Australand is being bought out by a Singapore company.
Those remaining learnt their lesson, carrying less debt and management hubris. Still, that doesn’t account for why they’re beating most of the sharemarket, except it must help that they were marked down too far to begin with and many are potential takeover targets.
Since REITs should supply a decent, reliable income from rents rising with inflation rather than a capital gain of any consequence, though have managed both of late, their real friend has been the remarkable rally in bonds.
A surge in buying by central banks has pulled down the yields of Australia’s AAA-rated government bonds and so far it’s made anything producing an income look good.
For REITs low bond yields are like dipping in a mineral spa, cleansing them of financial impurities. Their cost of borrowing drops as money market rates fall for one, leaving more income that can be distributed to unitholders.
But wait, there’s more. Bond yields are critical for property values as well. They’re the risk free benchmark for all other rates.
For housing they influence fixed rate mortgages, for example.
Bonds also set the minimum for the capitalisation or cap rate which is the rental return divided by its market value.
This is the yield that investors demand from a property at any given time. Since the rent is fixed the price has to adjust to meet the prevailing cap rate.
So as it falls the property will be worth more, though it won’t happen overnight especially as REIT valuations are only done periodically.
And bond rates are going to be low for ages, with thanks going less to the Reserve Bank and more to all the other central banks.
