Looking ahead, there’s going to be a couple of key challenges next year…
Ok, the year is almost done and dusted. I’ve already started wearing my boardies into the office. My work-ethic has already switched over to margarita mode.
But let me drop a few thoughts on what 2019 has in store for us, and what I reckon the key themes will be – and what the key themes guiding my investments will be.
Theme 1 – Cashflow is King
With growth tapping out in 2018, and the Royal Commission and ongoing regulatory pressure meaning that we’re probably looking at a slow start to 2019, investor focus is going to shift further towards yield and cashflow.
On top of that, if Labor gets in at the next election (which I reckon they will if they can keep Bill Shorten’s profile low enough) then we’re probably looking at them delivering on their promise to reform negative gearing. That will change the yield equation even further, and put an even greater premium on cashflow performers.
That might shift the focus of investor activity out of the capitals (where average yields are ordinary at best) towards higher-yield regions.
This could have some interesting effects. Investors aren’t used to hunting for yield. There might be some adjustments, and investors will need to be careful.
For example, if you go to one of the data providers and look at their Top Twenty Yield Reports for example, then you’ll find the cashflow capital of Australia is Cairns. Right now, average yields on apartments are around 8%.
So investors are going to pile into Cairns, right?
Well, I hope not. I mean, there might be good manufactured growth plays on offer, but the yields equation is a trap.
I always thought the high yields in Cairns were to compensate investors for lousy growth – prices have been practically flat for decades.
But that’s only part of the story. Take a look at this property here for example. It’s an attractive unit in the premium suburb of Palm Cove. They’re taking offers over $230,000, and it’s currently tenanted at $320 pw.
Those numbers are pretty wow. That’s like a gross yield of 7.5%.
But then read a little further, and the Body Corporate Fees are $11,000 a year! (Lush lagoon pools, cyclone insurance, elevators etc.). So on a fully tenanted rental income of under $17,000 a year, you’re paying $11,000 in Body Corporate Fees, before costs.
That’s a yield of like 2.5%.
Not much to like about those numbers, especially in an area that has underperformed on capital growth for years.
While we’re thinking about traps for investors, let me ask you this. Is it illegal to rent your property to a friend?
No, of course not.
Is it illegal to lend your friends money? No, of course not.
Is it illegal to lend your friends money so they can rent your property at inflated yields so it sells at a higher price?
Probably, but it might be hard to discover or prove.
As focus shifts to yield, make sure you’re doing your due diligence on what the market is doing, not just particular properties.
Theme Two – Townhouses to Hold Focus
As I’ve written previously, the composition of construction in Australia has shifted heavily towards townhouses in recent years, particularly in Sydney and Melbourne.
Townhouses offer families a liveable but more affordable option, and townhouses themselves are politically sellable – they create more affordable stock without turning into an area into sky-scraper land.
What’s more, given the focus on cashflow outlined above, and given that negative gearing will probably be preserved for new builds, I expect townhouses to continue to come to the fore.
Townhouses can offer attractive yields to investors and developers, especially if they’re built well in popular locations. I’ve been focusing on townhouse development for a while now. I don’t see any reason to change that in 2019.
Theme Three – Decentralisation is a Pipe Dream
I expect a few market analysts to get a bit frothy about the regional markets in 2019. It’s easy to make the case – the capitals are consolidating, and decentralising the population is going to be a hot battle-grounds going into the election.
However, I reckon decentralisation will remain a pipe dream. Population flows where jobs grow, and I don’t know how you force migrants, or anyone, to live out bush. We’ll get a lot of chatter, but I don’t expect much will come of it.
I think the regions will continue to grow, but not spectacularly. They’ll be good targets for manufactured growth plays, but I wouldn’t be expecting anything spectacular in terms of natural growth.
Don’t believe the hype.
Have a Great Year Everyone
So that’s my thoughts about the year ahead. I hope this year has been a successful one for you, and I hope you’ve got something out of my musings. Tune in next year for even more market commentary, political insight and inappropriate comedy.
The stuff I’m famous for.