“Property price slump slows from record speed” and “Sydney’s property market is in a historic annual price fall.” These are two of many headlines plucked from major news publications in Australia to start 2023.
Although these headlines relate to residential property markets, a similar headline could have been used for listed real estate investment trusts (REITs) in 2022. In 2022, the S&P/ASX 200 A-REIT Index declined by -21.46 %. Investors may wonder whether the decline will continue in 2023. Investing in Real Estate Investment Trusts: What are They? REITs are companies that own, operate, or finance income-generating properties. REITs allow investors to gain exposure to real estate assets without directly owning them. There has been rapid growth in Australian REITs over the last few years, with a growing number of investment options available. Low interest rates, a stable economy, and investor demand have all contributed to this growth. Your local financial planning Newcastle services (or whichever town you live in) may be able to provide more information about REITs. There are Many Advantages to Investing in REITs To avoid taxation at the trust level, REITs must pay out at least 90% of their taxable income in dividends to shareholders. This is one of their key advantages. For investors seeking a steady income stream, REITs are an attractive option due to the low interest rate environment. How attractive are REITs now that interest rates are rising? The key phrase in the preceding sentence is "in a low-rate environment." The million-dollar question is whether or not property investments become less attractive if interest rates continue to rise. This may be true for residential property investment, but there are a few key factors that may offset it. Trends in REIT Performance It is forecast that interest rates in Australia will increase by 50 to 100 basis points this year, which means real estate investors are in for another tough year. The average return on Australian listed REITs has been 7% during the last seven RBA tightening cycles (increased interest rates). It is important to understand why the RBA raises the cash rate in order to decode the above data. Lower unemployment rates, increased wages, and higher consumer spending increase inflation. Rents will rise during a cycle when they are highly correlated with the Consumer Price Index (CPI), and revenues will remain high once interest rates stabilize in a cycle when rents are highly correlated. The declining gearing rates of REITs will benefit them once interest rates peak. They are down from 46% 15 years ago to 27.5% on average. Experts have taken this even further by overlaying 30 years of RBA cash rate data with a 30-year performance chart of the S&P/ASX 200 A-REIT Index (XPK). A-REIT returns are assumed to be negatively correlated with changes in cash rates, but the chart below shows that interest rates aren't always the driving force behind real estate returns. Between 2001 and 2009, there is a positive correlation between the two data points in the chart above. In the wake of the dot-com crash, investors turned away from internet stocks, and they looked for safer investments rather than investing in REITs due to the current cash rate. Financial planning Newcastle services can help. REITs: The Future The property market is concerned this year that property valuations will be lowered. As interest rates rise, capitalisation rates (cap rates) on properties rise. As a result of higher cap rates, investors expect a greater return on their investment, which reduces the value of a property. Because interest rates have increased, government bonds now provide investors with higher risk-free returns. Due to the increased risk involved, investors expect REITs (and other investments) to yield higher returns. As a result, property values may fall, which in turn may increase yields. In 2023, cap rates across the REIT index are expected to rise, but some sectors will be more affected. The subdued leasing activity may result in a decline in valuations for office REITs as hybrid working takes hold. The cap rates of REITs specializing in healthcare and non-discretionary retail, on the other hand, can be relatively stable because landlords can raise rents in line with inflation. We recently reduced our weightings towards the aforementioned and increased our weightings towards the latter. To Summarize Investors need to consider a variety of factors when investing in REITs, including the quality of the underlying properties, the management team, and the company's financial health. Investors should also consider overall risk profiles in addition to dividend yields and capital growth potential. Given a -20% decline in the REIT index, 2022 should be a better year for REITs. Please contact your local financial planning Newcastle services (or whatever town or city you live in) if you have any questions. Related Blog: What You Need to Know in Investing in Your Children’s Future
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A few years ago, a granny flat was a small room reserved for elderly parents by their family members. This is no longer the case as they have turned into luxurious self-contained dwellings. For most people, a home can become overcrowded as the number of family members keeps growing. But a granny flat offers a win-win scenario where elderly parents have their own quiet space while dad and mum also enjoy their peace of mind in a nearby place. This is where financial planner Gold Coast comes in. In this blog, we take time to reflect on why a modern granny flat has become such a popular investment option and what people need to know before they venture into this type of investment. Its popularity is increasingly rising! At Oracle, we always get inquiries from the public regarding granny flats. Many families are becoming concerned about their elderly parents and the need to offer them better accommodation away from the overcrowding and noise of other family members. Additionally, the prices of houses are on the rise and many young adults are unable to pay for mortgages and own homes. Financial planner Gold Coast can help you make the right choice. Below are other reasons why granny flats are becoming popular as an investment option: 1. Increased demand The demand for granny flats has recently increased thanks to young couples, students and singles. Besides, granny flats have also proven to be an affordable and viable housing option for retirees who would like to downsize and are not part of the sea change phenomenon. 2. Lower Costs Another major reason why granny flats are becoming popular is the cost of developing them. It is a lot cheaper to construct a granny flat compared to purchasing a standalone investment property. 3. It can increase the resale value Adding a granny flat to an existing property has the potential of increasing its value significantly. This can help you attain your return on investment (ROI) much faster than expected. With proper guidance from financial planner Gold Coast, the value of your property can increase within a short time. 4. Depreciation Renting out a granny flat gives you additional claimable on the depreciation schedule. 5. It can help investors build their portfolio Increasing value using a granny flat can significantly raise your capital value as well as rental income. You can use the extra rental income to boost or sustain your ability to service loans. This can also give you a stronger financial muscle to acquire more investment property. As an investor, you should understand Centrelink treatment of granny flat arrangements considering the implications for home ownership, deprivation and estate planning. A granny flat plan can be viewed by some as a more viable option compared to relocation into an Aged Care Facility or retirement village. You should however note that avoiding an Aged Carew Facility entirely may not be possible. Talk to financial planner Gold Coast and increase the value of your property. Shopping In A Physical Store Is Still A Thing: How To Stand Strong In The Online Marketplace24/9/2021 In our last “Looking closely at the Online Retail Market” blog by Luke Winchester, we talked about how it’s becoming increasingly expensive to run a consumer brand—especially with the rise of online retailing. In short, it’s difficult to compete.
What we mostly saw across the retail industry was a slowing of growth in these companies when compared to when the COVID-19 pandemic began. Investors were concerned because of the high multiples companies were trading throughout the pandemic. That combined with the increasing costs needed for online companies to produce revenue growth, and financial advisor Central Coast had much to be concerned about. It's a competitive market these days, even more so than in previous years, because of the pandemic. To stay afloat, companies have to be smart, strategic and know when to cut their losses. The omni channel companies seem to have been able to do this better during the pandemic, and that's why we recommend them. An Investment Ethic At Oracle, as the local financial advisor in Central Coast, we invest in companies that are continuing to increase their margins and are sustaining them as they grow the top line of their businesses. At Oracle, as a financial advisor in Central Coast, to help the locals, we have built the Oracle Emerging Companies portfolio to include businesses that have a presence in several areas—such as online and physical storefront. An example is Premier Investments. The retail giant, which is led by Solomon Lew, produces brands such as Smiggle, Just Jeans and Peter Alexander. What made Premier Investments so successful is that it was able to reduce its costs and increase its profit margins over time. When the pandemic hit, Premiere Investments negotiated leases and rents with landlords. It had the wisdom and foresight to close stores that were struggling. Over time, it increased its revenue and didn’t go under. Take a look at the chart below detailing Premier’s half-year results for 2021. The Sum of the Parts For retails that have an online presence only, there is a good amount of pressure in the market because off rising costs. It's not an impossible market but retailers should understand what they are getting into. Tech companies such as Facebook and Google are still some of the major companies Australians rely on. This make the competition fierce for online-only companies. However, multi-channel retailers are showing more promise. This companies have consistently been able to ride the wave of the pandemic by maintaining or decreasing their margins. Even if companies have a brick-and-mortar storefront, they were able to renegotiate lower rents to stay afloat. Plus, omni channel retailers are more reasonably priced than online-only retailers. At Oracle, as your financial advisor Central Coast, we prefer the omni channel retailers in the Oracle Emerging Companies portfolio. Related Links: Wix |