In this article, Stronghold Investment Management Head of Property and Advisory Steve de Nys offers his advice about investment trends in property and the benefits of diversification.
Steve de Nys is a founding director of The Suburban Alliance, past chair of The Property Council of Australia’s Industrial Committee and has more than 20 years experience in the commercial and industrial property sector as an agent for global property groups Savills and JLL.
So what does Steve think the property trends are and where is the best place to invest?
“Despite a couple of recent borrowing cost increases, interest rates on bank deposits remain at historically low levels and there is little expectation that this will change over the short to medium term. As a consequence there are a lot of investors, particularly those with Self Managed Super Funds who are looking for better returns.”
But Steve says the residential property market is “a very dangerous place to be”.
“When you negatively gear a property, you are relying solely on capital growth for an investment return.
“Residential property has seen strong capital growth over the last few years but with many experts predicting that market has peaked or is close to peaking, there is a very real risk that capital growth will be limited over the short-medium term and in some areas and sub-sectors may turn negative.
“With possible changes to negative gearing allowances and capital gains tax in response to the ‘affordable housing crisis’, there is no guarantee of capital growth over the medium-long term.”
Recently the Australian commercial property has been touted as the golden goose of property asset classes. Even during the GFC, commercial property continued to deliver good cash returns (via tenancy income).
Steve said while commercial property yields have shrunk over the last four to five years as a result of increasing demand for investment properties, there were still good returns to be made on the right asset.
“Our investors are currently earning between 8.5% and 11% per annum and that’s exclusive of capital gains. So investors can get good returns on their money.”
“I definitely wouldn’t say put all your eggs into one basket but you should consider commercial property investment as part of a diversified investment portfolio.
Stronghold is making commercial property more accessible to investors by creating wholesale property trusts which allow investors to contribute to a fund and purchase large multi-million dollar assets.
The downside of a property trust is that it’s a long term investment (usually for 5-7 years) and like all investments, capital growth is not guaranteed. The upside is net cash returns are paid monthly, bi-monthly or quarterly and the industry is very well regulated.
Stronghold specialise in suburban business parks and have eight unlisted wholesale property trusts managing $150million worth of assets. The company currently has a new Melbourne property trust in the suburb of Monash open for subscription.
Why suburban? Why Melbourne?
“We focus on business precincts that offer exceptional access and relatively high ratios of cost effective car parking,” Steve said.
“In our experience, these qualities are highly sought after by car dependent businesses that require efficient access to and from a regional network.
“We are firm believers in and advocates of the suburban economy - 85% of all metropolitan jobs are based in the suburbs and 90% of all residents live outside the 5klm ring of our CBDs (Elliott, 2015). As congestion increases we believe demand for work places closer to where people live will increase significantly.
“In some markets, particularly Sydney and Melbourne there is a strong argument for rental growth in the suburban business park sector. Competition is limited with the supply of new stock driven by demand, and relatively limited speculative supply.”
So what features should you look for in an unlisted property trust?
“Tenants are critical to the success of any commercial property investment,” Steve said
“For quality tenants, a good location with easy access, plentiful, cost effective car parking and modern facilities are essential. It is also important to ensure the rents are at or below market, as over rented properties will have limited prospects for capital gain as lease terms near expiry.
“For investors, modern buildings also offer depreciation benefits. “
Mr de Nys said the new Melbourne property trust which Stronghold has open for subscription ticked all those boxes and more.
“Our Mulgrave Property Trust No. 11 is two modern, freestanding fully leased office buildings on its own title. It has affordable net passing rents of $217-$238/m2 which means it has potential for rental growth and will remain attractive for tenants.
“It’s also in a central position within the Monash Employment Cluster (MEC). The MEC has Melbourne’s largest concentration of jobs outside the CBD. The Victorian Government has plans to double the number of jobs within the cluster.”