We take a look at where property investments—and interest rates—might be heading this year and beyond.
Judging by the high rate of home ownership and the size of the property index on the Australian Stock Exchange (ASX), property matters to most Australians.
The cooling of the residential property sector in recent years, especially along the eastern seaboard in metropolitan cities, has been offset by solid growth in many retail, commercial and industrial properties.
Small businesses that own their business premises may have benefited from this trend.
So where is property heading in 2006 and beyond?
Interest Rates
After one 25-basis-point tightening earlier in 2005, the Reserve Bank of Australia paused. We expect interest rates to remain on hold until the resources boom generates accelerated growth in the Australian economy, with interest rate increases to resume later this year. Our modelling suggests a rise in the Australian cash rate towards six percent this calendar year.
The performance of the property sector to date has been supported by ongoing low interest rates, and if interest rates rise we expect this support to decline.
Volatility
While there’s every confidence that share market conditions will remain strong in 2006, we also believe they will continue to be volatile, highlighted by corrections on any negative news. Using short-term peaks in the market to reduce exposure to cyclical and growth sectors, and switching to defensive investments, is one strategy to consider.
Defensive Investments
Defensive investments are those where earnings are not reliant on highly cyclical factors. One such sector is the Listed Property Trust (LPT) sector. LPTs, currently valued at around $86 billion on the ASX, generally performed well in 2005. The S&P/ASX 200 Property Trust Accumulation Index generated returns of around 12.3 percent.
Concern over development and construction risk and profit downgrades was a focus over the past year, and while these risks still linger the defensive characteristics of LPTs remains evident.
Property Exposure
Opportunities for property exposure include companies involved in a range of property activities such as development, funds management and land sales. It’s important to evaluate several aspects of a company before investment. This may include an assessment of the company’s fundamentals; management experience and track record; quality of projects or assets; and the strength of its project pipeline. An experienced investment adviser with access to quality research can be of assistance.
If there are strong company fundamentals and a solid business strategy, then despite negative sentiment which may periodically surround the sector, property is an investment which over time benefits from its leverage to a strong economy and growing population.
* This article is for general advice only. We have not considered your relevant circumstances. Before acting on this advice you should contact your investment adviser.
