Low-risk Australian property better than government bonds: UBS

Larry SchlesingerDecember 8, 2020

Low-risk, income-generating Australian real estate will continue to appeal to global investors in 2012, according to investment bank UBS. 

UBS global property real estate strategist Elisabeth Troni  says real estate yields in Australia, Japan, the core eurozone, the UK and the US are trading between a premium of 2% and 4% over 10-year bonds and above historic averages, suggesting pricing remains attractive.

“Yield spreads are well above average in Core Europe, the UK, the US and Australia,” Troni says as part the bank’s Investing in 2012 report. 

According to Troni, global investors are expected to continue to show an appetite for low-risk “core” property assets and avoid more risker, higher-return offerings. 

In a low-interest-rate environment, she says, “most investors remain focused on stable, income-producing investments”. 

“Unlike the recent past, we do not expect a significant shift of fund flows from core into riskier strategies, despite the wide spreads available.” 

Troni says that in the wake of the financial crisis, investors in property have been faced with the problem of generating income in an environment of slower growth and lower interest rates. 

“This search for income is putting into sharp focus the relative pricing of risk across many types of real estate. 

“Real estate is a hybrid of bond-like cashflows from rental income and equity-like gains from capital appreciation. 

“Core real estate, by definition, involves low leverage and stable tenants, which reduces risk and produces distributable income. Core real estate strategies focus on the income return, while opportunistic strategies focus on capital growth and value-add strategies balance the two. 

“Assessing the outlook for global real estate depends to a large extent on the path investors take as they ‘reach for yield’. On an absolute basis, yields on core assets with long-dated income are below long-term averages, making this segment look less attractive (i.e., more expensive). 

“However, this should be expected during a time of heightened global economic uncertainty. The available yield spread between core and value-add investments is wide, suggesting that investors are once again being rewarded for increasing their exposure to non-prime/secondary assets.” 

Troni say while value-add strategies have lagged as investors remain cautious against the backdrop of stagnating economic growth, opportunistic strategies have received reasonable interest from investors. 

“These strategies have largely appealed to investors with the high-risk appetite required to invest in distressed pools of assets or emerging-market growth strategies.”

The full report can be downloaded here.

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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