Investment Returns

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<p><span>The Australian Bureau of Statistics (ABS) released housing finance data for September 2015 earlier this week.</span></p>
<p><a href="/images/2015/11/12/Screen%20Shot%202015-11-12%20at%2010.10.17%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
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<p><span>The broad housing finance trends show that demand from the owner occupier segment of lending is falling while demand from investors fades.  Of course since late December last year we have seen limits come into effect regarding annual investment credit growth as well as, more recently, higher interest rates for all investment borrowers and lower loan to value ratios for many.  </span></p>
<p><span>Given these changes it is no real surprise that demand from this market segment is falling; there is less investment borrowing to be had and lower LVRs mean that for many borrowers negative gearing becomes somewhat less attractive. On the other hand, demand from owner occupiers is rising, largely from upgraders and those refinancing while there is little sign that first home buyer demand is rising. </span></p>
<p><span>Much of the recent refinance activity has subsequently translated into eventual housing investment, it will be interesting to see if the current refinance activity is just home owners shopping around for a better mortgage deal or if it will start to flow to investment in other asset classes.</span></p>
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<p><span>Looking more closely at owner occupier lending, the seasonally adjusted data shows that there was $21.0 billion worth of commitments in September 2015.  This represented a monthly increase of 3.0% and a year-on-year rise of 23.1%. The $21.0 billion consisted of $1.8 billion in lending for construction of dwellings, $1.3 billion in lending for purchase of new dwellings, $6.7 billion in lending for refinances and $11.2 billion in lending for purchase of established dwellings. </span></p>
<p><span>Each of the four components of owner occupier housing finance commitments have increased over the month with most having increased year-on-year.  Year-on-year, the changes have been recorded at -1.3% for lending for construction of dwellings, +32.1% for lending for purchase of new dwellings, +30.0% for refinances and +23.0% for purchases of established dwellings. </span></p>
<p><span>Clearly owner occupier demand is rising however, the ABS does note that ADIs are currently making changes to lending classifications which are seeing more investor loans classified as loans to owner occupiers. This will be contributing to a proportion of this rise, how big that proportion is we are unsure.</span></p>
<p><a href="/images/2015/11/12/Chart-3.jpg" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2015/11/12/Chart-3.jpg" alt=""></span></p>
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<p><span>In September 2015 there was a seasonally adjusted $12.3 billion worth of housing finance commitments to investors, this was the lowest value of investor lending since August 2014.  The monthly value of lending to investors has fallen by -12.8% from its peak of $14.1 billion in April 2015.  The $12.3 billion figure consists of $0.6 billion in lending for new construction which is the lowest level in a year and $11.7 billion in lending for established homes which is the lowest level since August of last year.  Lending for new construction tends to be volatile however, it has fallen by -42.2% from its recent peak of $1.1 billion worth of commitments in December 2014.  The less volatile investment lending for established homes has fallen by -11.0% from its peak of $13.1 billion in April 2015.  Again, recent reclassifications of lending by ADIs will be contributing to some of the recent weakness however, a changing investment lending landscape is undoubtedly the most significant contributor.</span></p>
<p><span>The latest housing credit data shows that the annual rate of investor credit growth still remains above 10% (10.4%) so it is reasonable to expect that investor housing finance commitments will continue to fall over the coming months. With the rate of value growth slowing, higher interest rates and lower LVRs for many investors, the attractiveness of purchasing an investment property is also easing. </span></p>
<p><span>While investment lending has been cooling down, owner occupier lending has been rising however, much of the rise is due to upgraders and refinances.  We anticipate that this trend is likely to continue although probably not rising by the same magnitude as we’ve seen over recent months. Furthermore we anticipate that less of the refinance activity is going to flow back into housing in the form of investment purchasing.</span></p>
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<p><em>Cameron Kusher is research analyst for CoreLogic RP Data. You can contact him <a href="https://blog.corelogic.com.au/author/cameron-kusher/" target="_blank">here</a>.</em></p>
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ckusher-ujnxiKuFQs

Investor housing demand continues to fall sharply: Cameron Kusher

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<p>SMSF retirees need to save more to achieve their retirement goals due to a weaker investment outlook that indicates returns will remain lower for longer, according to new research.</p>
<p>According to a scenario from the report titled SMSFs Treading Water, a 65-year-old SMSF couple to afford a comfortable retirement (as defined by ASFA1) has increased by 17% from $702,000 to $824,000. </p>
<p>However, 66% of SMSF trustees can remain confident (with an 80% probability) that they are well placed to live comfortably in retirement on $60,063 a year, according to the report by the SMSF Association and SMSF retirement experts Accurium.</p>
<p>At a higher spending level of $70,000 a year, 50% can be confident of achieving this goal, while 39% can be very confident of doing so. </p>
<p>The median desired spending level in retirement for an SMSF couple is $78,800, up from $75,000 a year earlier, says the report. However, 24% of SMSF couples aim to spend over $100,000 a year in retirement. </p>
<p>At an aspirational level of $100,000 a year spending, 28% can be confident and just 20% very confident. </p>
<p>Another key finding is that the median balance for a two-member SMSF at retirement rose to $1.137 million for the 2016 financial year compared with $1.124 million for the previous year. SMSF median balances at retirement have risen 17% since 2010. </p>
<p>Contrary to the widely-held belief that bequests are central to SMSF retirement plans, only 7% of SMSF households have specific inheritance plans. </p>
<p>More than half of SMSF retirees cannot be reasonably confident (80% probability) of achieving their desired lifestyle in retirement, although about 25% can be very confident (95% probability).</p>
<p>One in four are unlikely (less than 50% chance) to achieve their goals.</p>
<p>SMSF Association head of Technical Peter Hogan said the report highlights that most SMSF trustees are still on track to meet their retirement goals, despite a difficult investment environment and low interest rates. </p>
<p>“But for trustees and their specialist advisors, these are challenging times, especially on the investment front. From our perspective, this is why it’s critical superannuation has a sustained period of stability free from significant changes to give trustees greater confidence in the system.” </p>
<p>Accurium’s general manager, Douglas McBirnie, said the Reserve Bank had said in July that the neutral nominal cash rate, a key indicator, was now 3.5% rather than 5% previously, indicating an increased probability of a ‘lower for longer’ situation — interest rates and equity returns remaining low.</p>
<p>“The upshot for the average SMSF household approaching retirement is that their improving balance has not been able to keep up with the increased cost of meeting their desired lifestyle in retirement,” said McBirnie. <br>  <br> “Even so, SMSF households are still better placed than most sectors of the community to meet their financial goals in retirement.”</p>
<p>The SMSF Association and Accurium study is the first report to provide detailed figures on how the retirement wealth of Australia’s SMSFs has changed post the 2016 SMSF annual tax returns. </p>
<p>The report draws from Accurium’s database and looks at how SMSFs have fared in the 2016 financial year and considers how well prepared trustees are for retirement.</p>
<p>The research shows that although SMSFs are generally well prepared for retirement, lower expected investment returns means that trustees need to review their retirement plans to ensure they have enough capital to support their retirement goals.</p>
<p>It takes a probability-based approach which factors in more than 2,000 investment scenarios to show the capital levels required for trustees to retire with confidence of achieving the retirement lifestyle they want. </p>
<p>Statistical analysis is drawn from a database of over 65,000 SMSFs (approximately 130,000 SMSF trustees) which precedes the Australian Taxation Office’s Statistical Overview for 2016, which is likely to become available in late 2017. </p>
<p>Accurium’s dataset represents SMSF households who are phasing into retirement.</p>
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jonathanchancellor-7SQnKwU6yx

Lower investment returns to stretch SMSF investment goals, says study

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<p><span>Brisbane suburbs Eight Mile Plains and Runcorn are heating up as investment locations within the suburban Brisbane housing ring greater then 10km from the CBD.</span></p>
<p><span>The Herron Todd White July 2015 Month In Review said the previously 'unsexy' addresses appeal to enters and are affordable given the rarity of investment options now </span>available in suburbs such as Salisbury, Stafford and Keperra. An average 1980s brick 3 bedder in Eight Mile Plains is currently let for $430 per week - a gross yield of around 4.5%</p>
<p>Brighton, Sandgate, Deagon, Boondall, Taigum or Backen Ridge were also mentioned as spots where sub-$500,000 investments can still be found.</p>
<p>Attached 2 bedroom units can be found in Coorparoo, Greenslopes and Annerley from between $300,000 to $400,000. </p>
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<p><span>The report red flagged purchasing new units developed to lure investors in areas of possible oversupply.</span></p>
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mick.cee-iDmgDDAmu8

Eight Mile Plains, Runcorn get Brisbane property investment nod: HTW

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<p><span>The valuers HTW have advised on what is available at around $500,000 in Victorian's Gippsland district.</span></p>
<p><span>In the Traralgon area, $500,000 will buy a modern 4-bedroom home in a superior, close-in residential estate, or an older style, rural residential property on the outskirts of town. Older style properties in prime locations will generally sell for $400,000 to $500,000, especially if they have been partly renovated or have subdivision potential.</span></p>
<p><span>Sales of single dwellings in the Morwell and Moe/ Newborough areas over $500,000 are rare and generally represent large, high quality dwellings on large residential allotments or well established rural residential properties.</span></p>
<p><span>In Morwell you would be able to purchase four circa 1960s, commission style homes bringing a 7.5% to 8% rental return.</span></p>
<p><span>Standard residential properties in East Gippsland are generally well below the half million dollar level but you can spend that amount on a quality new build<br> or a well renovated period dwelling in a good spot, although these are rare.</span></p>
<p><span>Moving out of town in the Bairnsdale area, $500,000 will get you a rural residential property with a standard build of a circa 2000s, 4-bedroom, single level dwelling with a shed on up to one hectare of land. Older dwellings come with more land (up to 15 hectares) and you can get a pool, more shedding and better views for the same money. </span></p>
<p><span>Properties extending out into the Nicholson area are of the circa 1990s era and will be set up for horses with basic stables, a number of paddocks and are close enough to schools for family appeal and should be comfortably within the budget.</span></p>
<p><span>If you are looking to be closer to water you can get a modern house in the Paynesville area with a lake view, but not canal frontage, for around $500,000. </span></p>
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Gippsland's $500,000 property market: HTW

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<p><span style="line-height: 1.3em;">While the residential property market may be slowing, it is probably time to lock in your investment in commercial property, going by the rate of returns for the year ended March 31.</span><span style="line-height: 1.3em;"> </span></p>
<p><span>Commercial property delivered an average annual return of 14 percent, according to the Property Council-PD Australia All Property Index, now managed by MSCI, said a report in the <em>Australian Financial Review</em>.</span></p>
<p><span>The index measures only directly held property investments and excludes gearing in its calculations.</span></p>
<p><a href="/images/2016/05/18/Screen%20Shot%202016-05-19%20at%209.05.07%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/05/18/Screen%20Shot%202016-05-19%20at%209.05.07%20AM.png" alt=""></span></p>
<p><span>The result handsomely beat the 9.2 per cent return on property shares.</span></p>
<p><span style="line-height: 1.3em;">Rental returns drove the result. The average income yield on the $160 billion of property in the index was 6.6 per cent. </span></p>
<p><span>The S&amp;P/ASX200 A-REIT index, which includes the top 17 trusts, has delivered a 17.5 per cent total return since March 31. </span></p>
<p><span>For direct property, the March result was the best since the September quarter 2008 just before the financial crisis, the AFR report said.</span></p>
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<p><img src="/images/2016/05/18/Screen%20Shot%202016-05-19%20at%209.07.01%20AM.png" alt=""></p>
<p><span>The Reserve Bank has long warned of the disconnect between the underlying fundamentals in the sector and the commercial prices.</span></p>
<p><span>But AMP chief economist Shane Oliver has said several times that low interest rates favour commercial property. The RBA cash rate is at a low of 1.75 percent at present.</span></p>
<p><span>The article cited executive director of MSCI, Anthony De Francesco, as saying commercial property would "hover" around the current cycle peak for the rest of this year.</span></p>
<p><span>"Concern about the weakening domestic economy and global economy are likely to constrain demand for space," he said.</span></p>
<p><span>In the past year, the aggressive demand for commercial property has cut the yield across the MSCI index by 65 basis points to 6.1 percent.</span></p>
<p><span>According to Dr De Francesco, the office sector was strengthening while retail shopping centres and industrial sectors were moderating. He also noted that the Sydney office market was strengthening, while Perth was weakening.</span></p>
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jchancellor-FAypfDUnLy

Commercial property returns come out on top 

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<p>Amid the concerns around investing in property and shares, super funds as an asset class have in general delivered double-digit returns, according to two research groups.</p>
<p>Super funds delivered an average 10.7 per cent return for the year to June 30, 2017, marking the eighth consecutive year of positive growth, according to research group Chant West.</p>
<p>Even among the super funds, industry funds performed best, returning an average of 11.1 per cent. Meanwhile, for-profit retail super funds returned 9.7 per cent, meaning industry funds outperformed their competitors for all periods out to 15 years.</p>
<p>The funds were resilient even in the face of political and economic shocks such as  the election of Donald Trump as US President and Brexit.</p>
<p>"It's been a really interesting and, in many ways, surprising year because this strong result has been achieved against a backdrop of considerable uncertainty, both political and economic,” Chant West director Warren Chant said. </p>
<p>“It just shows how markets – which represent the combined views of thousands of professional investors – are able to cut through the 'noise' and focus on the investment fundamentals.”</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/07/20/ChantWest.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/07/20/ChantWest.png" alt=""></p>
<p>Rival researcher, SuperRatings, came up with similar results, with the average fund return for last financial year topping 10.4%. </p>
<p>SuperRatings estimates that $140 billion has been added to super accounts in investment earnings for the year.</p>
<p>“At a time when inflation hovers below 2% per annum, Australian super funds continue to far exceed expectations, with accrued earnings of well over 100% since the end of the GFC. Over the last 5 years alone, funds have averaged 10% earnings every year, more than erasing the pain of the GFC and putting retirees in a significantly improved position than they could ever have hoped for,” said Jeff Bresnahan, SuperRatings chairman.</p>
<p>Industry fund Hostplus topped the list with a 13.2 per cent return, with even the worst-performing fund in the median-growth category delivering 7.4 per cent, according to Chant West.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/07/20/SuperRatings.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/07/20/SuperRatings.png" alt=""> </p>
<p>Funds in the median growth category have 61 per cent to 80 per cent allocation to growth assets and are usually the preferred ones. </p>
<p>Funds that excelled this year tended to go against the investment trend, by having higher allocations to unlisted assets, which traditionally come at a significantly higher cost than the increasingly popular passive strategies, said SuperRatings in a media release. </p>
<p>“This once again debunks the argument that low cost investment strategies are good for Australians. Low cost passive strategies will only guarantee chronic regular underperformance, which will impact retirement benefits for all Australians and undermine the superannuation system.”</p>
<p>The top 10 performing funds in 2016/17 covered more than 6 million Australians and all exceeded the SuperRatings’ Industry Benchmark of 10.4%, it said.</p>
<p><a href="https://www.propertyobserver.com.au/images/2017/07/20/SuperRatingsOverall.png" target="_blank">Click to enlarge</a></p>
<p><img src="https://www.urban.com.au/images/2017/07/20/SuperRatingsOverall.png" alt=""></p>
<p class="p1">The key points to note for the 2016/17 financial year, according to Chant West were.</p>
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<li>Hedged international shares were the strongest performing asset sector, surging 18.9%. However, the appreciation of the Australian dollar pulled this return back to 14.7% in unhedged terms.</li>
<li>Australian shares performed strongly with a return of 13.8%.</li>
<li>After being the strongest performer in 2015/16, Australian listed property was the worst performing sector this year, falling 5.6%. Global listed property fared better, but still returned just 2.2%. Unlisted property, on the other hand, had another solid year, up 10.3%.</li>
<li>Infrastructure also performed well, with global listed infrastructure up 11.1% and unlisted infrastructure delivering returns in the low teens. Private equity also provided a healthy return of 11.3%.</li>
<li>The traditional defensive asset sectors yielded very low returns. Australian and international bonds barely made it into positive territory with returns of 0.2% and 0.5%, respectively, while the return from cash was just 1.8%.</li>
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prateek24-ezbwHMbNAk

Super funds deliver double-digit returns for eighth year in a row

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<p>EXPERT OBSERVER</p>
<p>The past five years have seen pretty good returns for well-diversified investors.</p>
<p>While cash and bond returns have been modest, growth assets have been strong.</p>
<p>Average balance growth superannuation funds have returned 8.5% pa over the five years to June and that’s after fees and taxes.</p>
<p>This is particularly impressive given that inflation has been around 2%.</p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/8/28/RETURN%201.jpg" alt=""> </p>
<p> <br>Shares have climbed a wall of worry in recent years with a revolving door list of worries around Europe, deflation, inflation, rate hikes, Trump, North Korea, China, trade, house prices, etc. And unlisted commercial property and infrastructure have benefitted from an ongoing search for yield. But can it continue over the next five years? This note looks at the main issues.</p>
<p><strong>Declining medium-term return potential</strong></p>
<p>While investment returns have been good, the medium-term (say 5-10 year) potential from major asset classes has been moving down.</p>
<p>Investment returns have two components: yield (or income flow) and capital growth.</p>
<p>Looking at both of these components points to lower average investment returns over the next five years compared to the last five years.</p>
<p>First, it’s well known that investment yields are not what they used to be. Back in the early 1980s the medium-term return potential from investing was pretty solid for the simple reason that interest rates, bond yields, dividend yields and rental yields were so high.</p>
<p>The RBA's "cash rate" was around 14%, 3-year bank term deposit rates were around 12%, 10-year bond yields were around 13.5%, property yields were running around 8-9% and dividend yields on shares were around 6.5% in Australia and 5% globally.</p>
<p>Such yields meant that investments were already providing very high income and only modest capital growth was necessary for growth assets to generate good returns.</p>
<p>As it turns out, most assets had spectacular returns in the 1980s and 1990s and balanced growth superannuation fund returns averaged 14.1% in nominal terms and 9.4% in real terms between 1982 and 1999 (after taxes and fees).</p>
<p><br>Since the early 1980s, investment yields have mostly fallen and this has continued over the last five years. See the next chart.<br> <img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/8/28/RETURN%202.jpg" alt=""></p>
<p>Today the cash rate is 1.5%, 3-year bank term deposit rates are 2.5%, 10-year bond yields are 2.5%, gross residential property yields are around 3%, commercial property yields are just above 5%, dividend yields are still around 5.3% for Australian shares (with franking credits) but they are around 2.4% for global shares. This on its own points to a lower return potential.</p>
<p>Second, the capital growth potential from growth assets is likely to be constrained relatively to the past reflecting more constrained nominal economic growth. Several megatrends are likely to impact growth over the medium term.</p>
<p>These include:</p>
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<div class="column">Continued slower growth in household debt.</div>
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<br>An ongoing backlash against the economic rationalist policies of globalisation, deregulation and small government, thanks in large part to weak wages growth and rising inequality resulting in populist, less market friendly policies – such as trade protectionism and rising regulation.</div>
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<br>Rising geopolitical tensions – most notably as the US attempts to constrain the rising power of China.</div>
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<br>Aging and slowing populations – resulting in slowing labour force growth and rising pressure on public sector budgets.</div>
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<br>Constrained commodity prices – as the surge in resource investment last decade boosts supply.</div>
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<br>Technological innovation and automation.</div>
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<div class="column">Continuing rapid growth in Asia and China’s middle class.</div>
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<div class="column">Rising environmental awareness and pressure to slow the human contribution to global warming.</div>
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<div class="column">The energy revolution resulting in a shift to sustainable energy as its relative cost continues to collapse.</div>
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<div class="column">Most of these will constrain economic growth &amp; hence investment returns, with declining population growth the most significant.</div>
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<div class="column"><strong>Medium-term return projections</strong></div>
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<div class="column">Our approach to get a handle on medium-term return potential is to start with current yields for each asset class and apply simple and consistent assumptions regarding capital growth reflecting the above-mentioned megatrends. We also prefer to avoid forecasting and like to keep the analysis simple.</div>
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<br>For bonds, the best predictor of future medium-term returns is current bond yields. If a 5-year bond is held for five years its initial yield will be its return. We use 5-year bond yields.</div>
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<div class="column">For equities, a model of current dividend yields plus trend nominal GDP growth (a proxy for capital growth) does a good job of predicting medium-term returns. This approach avoids getting too complicated.1</div>
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<div class="column">For property, we use current rental yields and likely trend inflation as a proxy for rental and capital growth.</div>
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<div class="column">For unlisted infrastructure, we use current average yields and capital growth just ahead of inflation.</div>
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<div class="column">In the case of cash, the current yield is of no value in assessing its medium-term return. So we assume a medium term average that allows for higher than normal bank rates relative to the cash rate and high household debt.</div>
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<div class="column">Our latest return projections are shown in the next table.</div>
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<br><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/8/28/RETURN%203.jpg" alt="">
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<br>The second column shows each asset’s current income yield, the third shows their 5-10 year growth potential, and the final column their total return potential. </div>
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<br>We assume inflation averages around or just below central bank targets.</div>
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<br>For Australia we have adopted a relatively conservative growth assumption reflecting constrained commodity prices and slower productivity growth.</div>
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<br>We allow for forward points in the return projections for global assets based around current market pricing – which adds 0.6% to the return from world equities.</div>
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<br>Combining the returns indicates the implied return for a diversified growth mix of assets has fallen to 6.2% pa.</div>
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<br><strong>Key observations</strong>
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<br>Several things are worth noting from these projections.</div>
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<br>The medium-term return potential using this approach has continued to fall due largely to the rally in most assets which has pushed investment yields lower.</div>
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<div class="column">Projected returns using this approach for a diversified growth mix of assets has fallen from 10.3% pa at the low point of the GFC in March 2009 to 6.2% now. Five years ago it was nearly 8%.<br><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/8/28/RETURN%204.jpg" alt=""><br>Government bonds offer low returns due to ultra-low yields.<br>Unlisted commercial property and infrastructure continue to come out relatively well, reflecting their higher yields.</div>
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<br>Australian shares stack up well on the basis of yield, but it’s still hard to beat Asian/emerging shares for growth potential.</div>
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<br>The downside risks to our medium-term return projections are that: the world is plunged into another recession driving another major bear market in shares or that investment yields are pushed up to more normal levels as inflation rebounds causing large capital losses. Just allow that drawdowns in returns tend to be infrequent but concentrated and it’s been a while since the last big one – see next chart.</div>
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<br>The upside risks are (always) less obvious but could occur if we see improving global growth but inflation remaining low.<br><strong><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2018/8/28/RETURN%205.jpg" alt=""></strong>
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<strong>Implications for investors</strong><br>First, have reasonable return expectations. Low yields &amp; constrained GDP growth indicate it’s not reasonable to expect sustained double-digit returns.</div>
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<div class="column">In fact, the decline in the rolling 10-year average of super fund returns indicates we have been in a lower-return world for many years – it’s just that it only becomes clear every so often with bear markets with strong returns in between. See the last chart.</div>
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<br>Second, much of this reflects very low inflation - real returns haven’t fallen as much.</div>
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<br>Finally, focus on assets with decent sustainable income flow as they provide confidence regarding future returns.</div>
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<br><em>Dr Shane Oliver</em><br><em>Head of Investment Strategy and Chief Economist AMP Capital</em>
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