Commercial real estate has emerged as a preferable option to residential property as housing prices continue to edge higher in Australia’s key markets.
All metrics now indicate that housing has become highly expensive if not overvalued within Australia, particularly when compared to rental yields.
Housing currently offers the lowest rental yields amongst all asset classes, with the exception of government-issued bonds and bank deposits.
The poor returns on residential real estate become particularly apparent when contrasted with other investment options in the property sector.
The gross rental yield on housing is currently estimated to be approximately 2.9 per cent – a return that is whittled down to roughly one per cent once costs are taken into account.
The gross rental yield for commercial property, however, stands at six per cent – more than twice that for residential real estate.
As a consequence, investors in residential property remain highly dependent upon capital growth in order to reap returns. This is a perilous position given the overheated state of housing market in many parts of Australia, as well as the possibility for an interest hike at some point in the future.
AMP Capital sees gains in home prices remaining at around five per cent in Australia over the upcoming 12 months. Increases are likely to be stronger in the cities of Sydney and Melbourne, although in other capitals, such as Perth and Darwin, price changes could be negative as a result of the ailing resources sector.
The overvalued condition of many parts of the Australian housing market also makes it vulnerable to any untoward contingencies that would hamper the ability of investors to service their debts – chief amongst them a surprise hike in interest rates.
Experts nonetheless contend that the RBA will continue to keep interest rates at unprecedented lows, with some foreseeing further cuts prior to the end of the year as part of efforts to boost the Australian economy in the wake of the mining boom’s demise.
In addition to a slump in prices for Australia’s key export commodities, moderate rates of inflation also favour the possibility of further rate cuts by the RBA.
The positive effect of sustained low interest rates on Australia’s property market could be offset, however, by conditions in the broader economy and stricter supervision upon bank lending by the APRA.