Property outperforms all others

Research by Bayleys Realty shows property has provided the best returns of all investment classes over the last 10 years. That’s not surprising given the astounding growth in the Auckland market, but it yet again shows one is hard pressed to find a better long-term investment than property.

The Bayleys data tracked the annual returns of various investments, including capital growth and income, over the last decade. The best performer was commercial property with an average annual return of 10.1%. Stock exchange listed property funds were second at 8.7%, and residential housing third at 8.4% (Auckland was the main contributor to that return with an annual return of 10.5%). Gold returned 8.37%, followed by shares at 6.3%, government bonds 6.2%, and cash deposits 4.6%.

Their research also showed gross rental returns varied widely depending on location. In Auckland rental yields were below 4% while in provincial NZ rental yields ranged between 6% and 8%.

A gross returns comparison is a little crude in that it does not account for other factors like tax and risk (volatility). On a risk adjusted basis the relative returns in favour of property would be even greater, and more so if one were to take into account the ease at which capital gains from property can be magnified using leverage (debt).

In contrast to property, 2016 has not started well for share market investors. Share prices have had one of their worst starts in decades, following renewed fears of a slow down in China. Trading on the Shanghai market was halted twice in the first week after the index plunged 6% in a single day and there is now a very large question mark hanging over the reliability of the economic data being reported by the Chinese authorities, with some saying the data is what the authorities would like it to be rather than what it is. The consequences of the reported data being fictional are potentially very serious for the world economies.

Late last year the ANZ and the Property Investors’ Federation released their annual survey of investor expectations.

Here are some of their key findings:

  • Confidence about buying property remains high. The proportion of investors planning to buy more properties within the next two years rose to a net 54% of respondents (up from 49% last year). Around a quarter of survey respondents plan on buying in the next six months.
  • Expected property value growth in the next year has jumped to a median of 6.3% from a median of 3.7% in 2014. Property value growth expectations over the next 5 years have also increased significantly, from 4.7% to 6.7%.
  • The median debt/value ratio has decreased from 60% to 58.7%. In other words, investors are not gearing up to buy additional property.
  • A majority of Auckland property investors expect the party to roll on for a while yet. The median expectation for house price increases in the region over the next five years is 8.2% per year (which in my view is optimistic).
  • Rental growth expectations for the next year have also risen, from 2.2% last year to 2.7% this year. Short-term growth expectations were the highest in the upper North Island.
  • Government regulation/tax was the number one concern for 57% of respondents, up from 52% last year.
  • Potential house price falls barely rated a mention as a worry with only 16% of investors mentioning it in their top three risks.

As far as investment strategy is concerned, they add a note of caution. “The housing market is notoriously hard to predict so investors considering increasing their portfolios will want to take their optimism with a big dollop of business prudence. A robust balance sheet is critical when potentially buying at the top of the market so that the investment can be sustained through periods of vacancy or changes in personal circumstances, such as job loss. For the Auckland market at least, it would be risky to rely on ongoing capital gains to reduce debt ratios from this point. Mortgage interest rates are not a one-way bet either – in this wobbly international environment, bank funding costs are beginning to creep up. ‘Hope for the best but be sure you can ride out the worst’ may be a prudent motto.”

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