AMP Capital's three post-GFC property fund lessons
The global financial crisis (GFC) caused many investors to re-think their strategies and while property investors managed to protect themselves more than others, property funds require specific attention.
AMP Capital’s Mark Ferguson head of Australian listed real estate and Christopher Davitt fund manager, wholesale Australian property fund, recently identified their three post-GFC lessons that all investors considering parking their money into a property fund can consider.
The hunt for income is as relentless as ever, they noted, recently evidenced by Roy Morgan’s stunning statistic of a recorded 37% uptick in investment property loans since 2010, the current low interest rate environment and low bond yields, which contrasted with strong forecasts for Australian property, may cause this number to surge even higher.
“Strong capital into the sector should translate into further price increases, which should support capital appreciation and grow future earnings over the long-term."
In fact, they noted that they expect Australian property to continue providing strong, reliable income streams for investors, particularly as the appeal of property is based on the stability of income despite rises and falls in capital values.
The strength of rental agreements in maintaining yield is a very positive factor. "These are generally signed on a long-term basis, so the cash flow of rental income is 'locked in' for a predetermined period,” they explained.
"The housing story keeps improving on the back of lower interest rates and foreign investment,” they said, with foreign investment so strong it has now attracted official scrutiny.
"Housing approval rates are up and capital-city auction clearance rates remain elevated despite high-profile company closures and job losses.
“Strong capital into the sector should translate into further price increases, which should support capital appreciation and grow future earnings over the long term."
They provided three investing tips, re-enforcing the concept that property requires a long-term investment outcome focus.
- Ensure you conduct research.
Look into a property fund's track record and "stick to fund managers with an established reputation and sound history". - Check that the gearing levels are not too high.
As some property funds look to borrowing capital as a necessity to boost their potential investment returns, which is a technique known as gearing, it's worth remembering that it magnifies the potential for both gains and losses. Everyone's comfort with this differs, so ensure that the gearing levels are not too high for your risk profile. - Understand underlying risks.
Each fund holds different investments that contain a different amount of risk, and you must be aware of the underlying risks of the fund you are considering. Be "mindful that funds investing in a single asset carry more risk than those that invest in a portfolio of properties".
They also suggested that investors be wary of properties with complex business models where there is a cross-collateralisation of debt.
In the long-term future, AMP Capital predicts direct property and Australian listed property to deliver robust income returns.