Commercial property and shares offer better returns than residential property yields: AMP’s Shane Oliver

Only 10-year government bonds will deliver poorer returns than residential investment property, suggests AMP Capital chief economist Shane Oliver in his latest commentary piece following yesterday’s decision by the RBA to cut the cash rate to 2.75%.

Yesterday, Michael O'Neill chief executive of National Seniors, the consumer lobby group for older Australians complained that the cut in the cash rate would “come as a blow for seniors living off simple investments such as term deposits”.

But it could be property investors relying on income from their investment properties that could be worse off.

In the current low interest rate environment, Oliver says that housing rental yields are “relatively low at around 4%, less once allowing for costs".

And while he says house prices are likely to rise over the next year or two, returns on residential property are likely to be “constrained by still high price to income ratios”.

Oliver expects average rental yields on investment property to fall to around 3%.

“This means the desire for better performing investments and specifically higher yielding investments will remain,” he says.

Rather than buy a residential property, investors could consider commercial property held in unlisted property trusts, where average returns are around 7%.

“Commercial property (office, retail and industrial) continues to offer relatively attractive income yields, particularly for unlisted property,” says Oliver. 

Recent unlisted property trust offerings have been higher than the average 7% yield.

The latest offer from fund manager Centuria has a forecast distribution of 8% on its 10 Spring Street Fund, which will be acquiring the 10 Spring Street office tower in the Sydney CBD.

Centuria’s 175 Castlereagh Fund, which closed oversubscribed, offered a return 9%.

If not commercial property then Australian shares, listed property trusts (REITS), Australian corporate bonds and even 12 month term deposits may be a better options than residential property.

“Australian shares have rallied strongly over the last year which has seen average dividend yields decline.

“But once allowing for franking credits, the dividend yield on shares at around 5.5% remains well above the yield available on term deposits.

“Lower interest rates will also help boost the outlook for profits and may help by lowering the value of the Australian dollar taking pressure off trade exposed companies. The broad rising trend in the share market is likely to continue

“Corporate bond yields have already fallen a long way, but their yields remain above term deposit rates and are a good alternative,” says Oliver.

He says sovereign bond yields are likely to remain low making them a “relatively unattractive investment in terms of return potential”.