A specialist commercial property lender has cautioned capital gains from non-residential real estate investments are currently unlikely to be as attractive as income returns generated by this asset class.
To support this analysis, Thinktank head of research Per Amundsen pointed to the recent significant drop in the MSCI All Property Index, which reflected a return of 8.6 per cent for the year ended 30 June 2019, representing the lowest level since September 2010.
By comparison, the index recorded a return of 11.6 per cent at the same time last year and 10.3 per cent six months ago.
“But for investors, and especially SMSF trustees wanting income, the outlook is more optimistic. Although income returns hit 5.4 per cent at 30 June 2019, they have traded in a fairly narrow band since peaking at 7.5 per cent in June 2010,” Amundsen said.
“Capital returns have been far more volatile over this period, peaking at 6.8 per cent in March 2016 and then falling gradually to 3.4 per cent in June 2019.”
He said retail property is the sector’s worst performer currently, with associated capital growth now in negative territory contributing to a fall in the total yearly return from 8.4 per cent a year ago to 3.7 per cent now.
“The Australian Bureau of Statistics showing a July retail sales slump of 0.1 per cent, as well as plans by major retailers such as David Jones to substantially cut back on the number of stores they operate and the space they rent, is clearly having an impact on investor sentiment,” he noted.
In contrast to retail property, the office and industrial sectors were currently performing well, he pointed out.
“The office and industrial sectors continue to bubble along, especially in Sydney and Melbourne, with the latter showing a 13 per cent return and the former an 11.6 per cent return in the year to June 2019,” he said.
“Although Sydney and Melbourne are the strongest markets for both these sectors, it’s worth noting all capitals show a fairly even and steady income return.”
Last month, Thinktank suggested the commercial property sector was one still worthy of consideration for SMSF investors, despite a recovery in residential real estate.