Provision Newsletter
Rebooting for retirement
As retirement comes into view, it’s time to imagine a new you for the post-work age.
You remember your first day at school, your first job, your first home. And now your final pay check is in sight. You’re nearly there. That’s quite an achievement.
How to be trigger happyAs with other big life events, retirement triggers choices that shape your future.
Read MoreAs retirement comes into view, it’s time to imagine a new you for the post-work age.
You remember your first day at school, your first job, your first home. And now your final pay check is in sight. You’re nearly there. That’s quite an achievement.
How to be trigger happy
As with other big life events, retirement triggers choices that shape your future. Whether it’s moving to that dream cottage at the end of the peninsula or flexing that senior’s card for cheaper travel, it’s time to take stock and reboot your life.
You didn’t rock up at your first day of work without investing in appropriate clothes or checking out what kind of transport would get you there.
As you did when you started to invest, it makes sense to make sure you’re ready when the time comes so you can minimise surprises and maximise your new free time.
Dollars and sense
For instance, if you’re downsizing your house or vehicle, you might consider how shedding assets and acquiring new ones affect your tax position before you retire.
If you haven’t already, now’s the time to understand how your future will be financed. With the help of Adam Spencer, AMP explains how you can access your super via different types of pensions, and how these compare with the government’s age pension.
Whether you’re unsure about super, tax or dealing with Centrelink, a financial adviser might be able to help. Please contact us on |PHONE| if you seek further assistance .
Having your finances in order is important, but there’s more than money to enjoying the fruits of your new phase of life. Here are five ways you can make sure retirement’s a milestone not a millstone.
1. Think mind and body
Without a clear idea of how you’ll spend your time, the initial euphoria of the untouched morning alarm can give way to anything from boredom to panic. Most of your 24 hours may be unstructured, so figure out how you’ll spend it wisely.
You might try something new. Perhaps now is the time to keep bees, join a choir or learn archery. If you have a partner, remember to involve them in the planning. Even if they don’t fancy joining you on a skydive, they may see a chance to learn how to take better action pictures.
Travel is near the top of many wish lists in retirement. If you don’t have the funds for a Caribbean cruise, there are a host of cheaper options around Australia and even beyond. And now you’ll have more time to spend, without worrying about annual leave quotas, or who’ll look after your business while you’re away.
2. Have a purpose
A rest is as good as a change. Recharging your batteries means getting them ready for your next challenge, rather than letting them go flat. Although it’s great to have unstructured time to think and dream, boredom can be a damaging state of mind, particularly if it’s prolonged. People who are no longer working can lose a sense of purpose, so make sure you have an idea of how you’ll use your extra hours to do something you love.
It’s OK to catch up on a few boxsets you missed out on along the way, but even Seinfeld only ran to 180 episodes, and most of them are only half an hour. If cocktail hour edges back before 5pm, that might be a sign you should join that book club or volunteer to widen your social circle.
It might mean doing more of what you love already, just more of it. Switching from sketching to watercolours. Thirty-six holes rather than eighteen.
If you’re already physically active, this can be a great time to extend yourself, embrace something new like yoga, or aqua aerobics. If you’re healthy but know you could improve, you might sign up for a sponsored cycle ride or walk to help a cause you care about.
3. Catch up on what you’ve missed
Many of us put off expanding our passions while we’re working because we don’t have time.
If you’ve always wanted to read the classics, now might be your chance to explore the jewels of world literature. Reading is brain expanding and inexpensive. Books older than 70 years from the death of the author are out of copyright and therefore cheap in print or even free on your Kindle. Plato and Charlotte Bronte take you to new lands without leaving your chair.
4. Follow your heart, not the herd
Just because the neighbours move to the beach house doesn’t mean you have to. You might prefer to be closer to the action of the city or just your favourite coffee shop.
Many people downsize coming up to retirement. A smaller property usually means lower utility bills and maintenance. Perhaps there’s an affordable unit close to your daughter’s place, or the first tee. If you’ve still got your long-gone kids’ stuff lying around the place, you could start the groundwork straight away, preparing your house for your new chapter.
But it’s not for everyone. If your spare bedroom has the right natural light for your artist’s studio or you just love your lemon trees, you might be better off staying where you are and saving yourself the real estate fees and hassles.
You’re facing a change in life, but you don’t have to change for change’s sake. Put yourself and your loved ones first.
5. Listen to the voice of experience
As with so many things in life, you can learn from experts . Talk to people you know who have already retired, and see what worked for them, and what they wish they’d put in place before they took the plunge.
Consider what will make you happy in the years beyond work, so you can live the life you want.
Finally, if you haven’t yet given these things serious thought yet, don’t panic. You’ve dealt with other changes in your life, this is just another one.
Think of it as a new adventure. Let’s face it, you’ve earned it.
This information is provided by AMP Life Limited. It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling |PHONE|, before deciding what’s right for you.
All information in this article is subject to change without notice. Although the information is from sources considered reliable, AMP and our company do not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP and our company do not accept any liability for any resulting loss or damage of the reader or any other person.
More 21 great investment quotes
The world of investing can be confusing and scary at times. But fortunately, the basics of investing are timeless and some investors (often the best) have a knack of encapsulating these in a sentence or two that is insightful and easy to understand. In recent years I’ve written several insights highlighting investment quotes I find particularly useful. Here are some
Read MoreThe world of investing can be confusing and scary at times. But fortunately, the basics of investing are timeless and some investors (often the best) have a knack of encapsulating these in a sentence or two that is insightful and easy to understand. In recent years I’ve written several insights highlighting investment quotes I find particularly useful. Here are some more.
The market
“Stock price movements actually begin to reflect new developments before its generally recognised they have taken place.” Arthur Zeikel
This goes to the nub of how share markets work – they are forward looking. Regularly I have seen share markets bottom and start moving higher even when the fundamental news is still terrible, only to see the news improve and vice versa. This is why many often get wrong footed – selling at bear market depths because the fundamental news is so bad and buying at the height of a bull market because the news is so good.
“It’s a basic fact of life that many things everybody knows turn out to be wrong.” Jim Rogers
This can’t apply to everything – eg if it’s raining outside then it is. But when it comes to investing this quote highlights how perverse it can be because when everyone is saying the same thing – like economic conditions are so bad shares can’t recover – then maybe the share market has already factored it in, the crowd has sold and the cycle will soon turn up.
“That men and women do not learn very much from the lessons of history is the most important of all the lessons of history.” Aldous Huxley
Which is partly why investment cycles perpetuate no matter how much regulators try and guard against a return to the behaviour which gave us the last boom and bust. The key for investors is to have an historical perspective, partly so they can filter the noise from what matters but also to help guard against being sucked up in periods of euphoria or pessimism.
“Cash is a fact, profit is an opinion.” Alfred Rappaport
This is one reason why dividends are great – providing they are not being paid for out of debt, they reflect that companies are actually generating cash and so can afford to pay the dividend.
Contrarian investing
“Even the intelligent investor is going to need considerable willpower to keep from following the crowd.” Ben Graham
When times are good the crowd is happy and fully invested. But it gets to a point where everyone who wants to buy has. This leaves the market vulnerable to bad news because there is no one left to buy. Similarly, after a sharp fall the crowd gets negative, sells their investments to the point that everyone who wants to sell has and so the market sets up for a rally when some good, or less bad, news comes along. So the point of maximum risk is when most are euphoric, and the point of maximum opportunity is when most are pessimistic. But for many investors trying to sell when the market is booming and all around you are euphoric is tough. As is trying to buy after the market has crashed and everyone is pessimistic.
Having a goal and a plan
“Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t, pays it.” Albert Einstein
Some may argue it was Patsy Kensit! But when it comes to investing, your best friend is time and the earlier you start, the better. This is the best way to take advantage of the magic of compound interest. (And the worst way to experience its downside is letting credit card debt build up!) The next chart shows the value of $1 invested in various Australian asset classes since 1900 allowing for reinvesting any income along the way. That $1 would have grown to $241 if invested in cash, $979 in bonds but a whopping $630,819 in shares.
While the average share return since 1900 is only double that of bonds, the huge gap in the end result between the two owes to the magic of compounding returns on top of returns. A growth asset like property is similar to shares over long periods. Short-term share returns bounce all over the place and they can go through lengthy bear markets (shown with arrows on the chart). But the longer the time period you allow to build your savings, the easier it is to look through short-term market fluctuations and the greater the time the compounding of higher returns from growth assets has to build on itself.
“Do not take yearly results so seriously. Instead focus on four or five year averages.” Benjamin Graham
In the short-term, the share price for a company, asset class returns or returns from an investment product bounce around a lot. But this is mostly just noise and is no guide to the future and should be ignored. When it comes to share market returns the longer the investment horizon the better. As can be seen in the next chart while rolling 12 month share market returns are volatile rolling 20 year returns are solid and pretty stable.
Source: Global Financial Data, AMP Capital
Process
“No matter how good the science gets, there are problems that inevitably depend on judgement, on art, on a feel for financial markets.” Martin Feldstein
This is about having the right balance between science (to keep you disciplined and immune to market sentiment) and art (because quant models can be wrong too and won’t know about everything impacting markets) in your investment process.
“If you aren’t thinking about holding a stock for ten years, don’t even think about holding it for ten minutes.” Warren Buffett
Unless you really want to put a lot of time into trading, its best to only invest in assets you would be comfortable holding long term. This is less risky than constant tinkering.
“I have always told people who asked for a stock tip that unless they were prepared to ring me every week for a sell decision, a stock tip was useless.” Nikki Thomas
Stock tips are interesting but unless you get them as part of a process with regular updates (including when to buy and sell) they are of dubious value beyond possible entertainment.
“Diversification for investors, like celibacy for teenagers, is a concept both easy to understand and hard to practice.” James Gipson
But you gotta try because if you only have exposure to two or three shares in your portfolio you could be exposed to a very wild ride at times and even the risk of permanent capital loss.
Noise
“Based on personal experience – both as an investor & an expert witness – rarely do more than three or four variables really count. Everything else is noise.” Martin Whitman
The information revolution has given us an abundance of information and opinion about investing. The danger is that information overload adds to uncertainty resulting in excessive caution, an overreaction to news and a focus on things that are of little relevance. So turn down the noise!
Pessimism
“Anything that can go wrong and doesn’t go wrong is just waiting for a much worse time to go wrong.” Anon
Those perpetually forecasting a crash in Australian home prices are an example of this sort of thinking. The human brain evolved in a way that it leaves us hardwired to be on the lookout for risks. So, it’s easier to be sceptical and pessimistic. As a result, bad news sells and there seems to be a never-ending stream of warnings of the next disaster. But when it comes to investing, succumbing too much to pessimism doesn’t pay. Since 1900 shares have had positive returns seven years out of 10 in the US and eight years out of 10 in Australia.
Self-perception
“Everyone has the brain power to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and [investment] funds.” Peter Lynch
If you can’t handle volatility in financial markets without making rash decisions, then either they are not for you or you should just take a long-term approach and leave it to someone else.
“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” John Bogle
Ditto. Successful investing is all about knowing yourself. Smart investors have an awareness of their weaknesses and seek to manage them. One way to do this is to take a long-term approach. If you want to trade day to day then you need to recognise that this requires a lot of effort, a rigorous process and a willingness to go against the crowd.
“A fanatic is one who can’t change his mind and won’t change the subject.” Winston Churchill
Many let blind faith in a strongly held view (“debt is too high”, “global oil production will soon peak”, “paper money will lead to economic disaster”, “Obamacare will destroy the US economy”, “the digital revolution means this time is different”) drive all their investment decisions. They could get lucky and be right at some point but end up losing a lot of money in the interim.
“If you don’t like something, change it. If you can’t change it, change your attitude.” Dr Mary Angelou
Following on from the last quote, to be a successful investor you need to humble, flexible and accepting of the reality of investment markets. Tilting at windmills doesn’t work.
Life balance
“Money is better than poverty if only for financial reasons.” Woody Allen
Classic Woody. But he’s definitely right.
“Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.” Groucho Marx
That may be true for him. But some of the best things in life are free (well, they don’t need money).
“Wealth consists not in having great possessions but in having few wants.” Epicetus
There is much more to being wealthy than just having money and possessions. We often focus on getting great possessions and hence the financial wealth to obtain them, but numerous studies show that beyond a certain level, more money won’t make you happier. And if we have fewer wants we are better able to focus on achieving those wants.
“Even right up to the end we found conflict with each other, which now means nothing. It just means nothing. If there is conflict in your lives – get rid of it.” Barry Gibb (on his relationship with Robin Gibb after Robin’s death)
Money often drives conflict. Try to make sure it doesn’t.
Author: Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia
Source: AMP Capital 24th Oct 2019
Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.
World’s Best Beaches 2019: The Votes Are In
How would you like to laze on one of the world’s best beaches for your next getaway? Voters in this year’s TripAdvisor Travellers’ Choice Awards ranked Australia’s Manly and Surfers Paradise beaches among the top 25. However, it’s these five dazzling stretches of sand that won the most sun-loving hearts.
5. Grace Bay Beach, Turks and CaicosThe poster child of the
Read MoreHow would you like to laze on one of the world’s best beaches for your next getaway? Voters in this year’s TripAdvisor Travellers’ Choice Awards ranked Australia’s Manly and Surfers Paradise beaches among the top 25. However, it’s these five dazzling stretches of sand that won the most sun-loving hearts.
5. Grace Bay Beach, Turks and Caicos
The poster child of the Turks and Caicos, Grace Bay often plays a starring role when it comes to the world’s best beaches. This tropical heaven is just a short flight from Florida and features easy access for boat trips to explore its barrier reef and incredible wall dives. Back on the beach, water sports take centre stage, with parasailing, banana boating and kayaking on a backdrop of pearly white sand and azure water. In terms of accommodation, take your pick of luxury resorts on the island of Providenciales, surrounded by world-class restaurants, shopping plazas and that all-important, easy-going vibe.
4. La Concha Beach, Spain
As far as city beaches go, San Sebastian’s La Concha certainly makes a sensory impact. The shell-shaped Concha Bay sets the scene for a diverse landscape including lush mountains and the city’s elegant architecture, like Miramar Palace. Find your own perch on the beach under a blue and white striped umbrella, to soak up the cosmopolitan atmosphere and indulge in people-watching. When hunger strikes, San Sebastian just happens to be one of the world’s foodie capitals, and nothing goes better with sun and sea than seafood tapas and sangria.
3. Eagle Beach, Aruba
With powder-soft sand that stretches on and on, Aruba’s Eagle Beach is often singled out as among the most beautiful in the Caribbean. Although you’ll find a holiday buzz along its sparkling shores, this is a low-rise hotel area with plenty of charming boutiques for a truly relaxing escape. Combine lazy days with turtle nest-spotting, photographing the iconic divi-divi trees and sipping cocktails at breezy beach bars. From here, it’s a quick taxi or bus ride to Oranjestad, the vibrant capital of the Dutch island.
2. Varadero Beach, Cuba
Varadero combines art galleries, markets, cigar shops and cabarets for a taste of Cuban culture, with the country’s premier beach destination. All-inclusive hotels, spas and restaurants line a spectacular, 20 kilometre stretch of uninterrupted white sand for a sun-drenched holiday. Sailing, glass-bottom boat rides and diving are at the top of the agenda, along with a round of golf or two. As the sun sets, a festive nightlife scene ensures you can get your fix of live music and salsa dancing.
1. Baia Do Sancho, Brazil
It’s not that easy to get to this year’s most-loved beach, which is perhaps part of the appeal for TripAdvisor voters. That and the fact that Baia do Sancho is a sheltered cove of glittering turquoise water and golden sand, wrapped in lush, forest-clad cliffs, on a paradise island. Keen beach-goers must traverse near-vertical ladders through a rock tunnel to feel that silky sand squishing underfoot, dive into the azure sea and enjoy the absence of crowds so often found on such slices of paradise.
You can count on it staying this way too, as the volcanic islands of Brazil’s Fernando de Noronha archipelago are part of a protected UNESCO World Heritage Site, with limited visitor access and an environmental fee to explore. To get there, the main island offers a small airport, with flights available from Recife and Natal.
Other beaches in the top 10 include Florida’s Clearwater, Spiaggia dei Conigli in Sicily, Grand Cayman’s Seven Mile Beach, Playa Norte on Mexico’s Isla Mujeres and that other famous Seven Mile Beach, in Jamaica. With so many inspirational shores to discover, it’s always a good time to pack the sunscreen and jet off to paradise.
Important:
This provides general information and hasn’t taken your circumstances into account. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
How industrial real estate is set for transformation in a 5G-powered world
Right now, the developed world is on the cusp of a fourth industrial revolution, and it is set to have a more transformative impact on everyday life than the three revolutions before it.
The fourth industrial revolution is about embedding the cyber world into everyday lives and workplaces. The roll-out of 5G is core to this revolution, enabling technologies which can
Read MoreRight now, the developed world is on the cusp of a fourth industrial revolution, and it is set to have a more transformative impact on everyday life than the three revolutions before it.
The fourth industrial revolution is about embedding the cyber world into everyday lives and workplaces. The roll-out of 5G is core to this revolution, enabling technologies which can power and transform energy management, transport networks, healthcare and entertainment.
A fundamental change in how we live, work and transact will have a knock-on impact to how industrial real estate is used and valued. This disruption presents both opportunities and challenges for investors – industrial real estate will see some big wins as 5G is rolled out, but not every asset will have the potential for gains.
Author: James Maydew, BSc (Hons), MRICS, Head of Global Listed Real Estate, Sydney, Australia
Source: AMP Capital 20 Sept 2019
Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.
Tips for boosting retirement savings and investments in a lower-for-longer world
Retirees now face a bold truth: investing in traditional safe haven assets do not provide the returns they once did. So, where to from here?
The first thing is to accept that today’s returns are lower on retiree favourites, like cash and bonds.
Second, there are tools available to provide forecasts for what the market will return over a 10-year period. These
Read MoreRetirees now face a bold truth: investing in traditional safe haven assets do not provide the returns they once did. So, where to from here?
The first thing is to accept that today’s returns are lower on retiree favourites, like cash and bonds.
Second, there are tools available to provide forecasts for what the market will return over a 10-year period. These forecasts have been relatively reliable through history and are useful for investors who, understandably, are looking at short-term volatility and thinking there is no hope in predicting long-term patterns.
What the future could look like
In our view, investors should expect lower returns on bonds over the next 10 years than the past 10 years, simply because the starting point of today’s yields is extremely low.
Low bond yields have the potential to cause other riskier assets such as equities to trade at higher valuations and therefore also offer lower expected returns. Because of market conditions, annuities may also pay less.
The combined effect in our view is that the expected return on a simple 50/50 stocks and bonds portfolio is likely to be less than 5% p.a. over the next 10 years1. The only compensation accompanying these lower returns is that this environment is likely to produce lower levels of inflation.
Source: Bloomberg, 30 August 2019
This is the lowest forecast return for this type of portfolio in history, matched only by those made in the run-up to the global financial crisis. In that instance, high equity valuations were driving down expected returns. This time, it’s low bond yields.
This is a very importance difference; if you were aware in 2007 that equities were the source of deterioration in your expected return, you could de-risk your portfolio into cash and bonds and still expect a reasonable result. However, in 2019, there is nowhere to hide.
To avoid the risk of holding a poorly performing asset, like cash and bonds, one option is to look beyond these conservative asset classes and take on higher levels of risk with more volatile assets. At a time when investors can least afford shocks to the downside, this is a conundrum with no simple answer.
Retirement savings, then and now
For retirees whose focus is to preserve and prolong their stockpile, all this begs the question: how large a reduction in retirement income should one expect?
To illustrate how much lower today’s average retirement income is expected to be, we can simulate a $500,000 investment in a simple portfolio of 50% Australian government bonds and 50% Australian shares with our current expected return of 4.9% and 2.5% inflation. Before looking at the chart, consider how far this is from the 11.9% historical return and 5.3% inflation rates of the halcyon days. This is where it hits home.
Source: AMP Capital
The bottom line is: retirement savings won’t last nearly as long as they have in the past. Based on the average market return from 1969 to today, a retiree could have expected to receive a comfortable retirement income2 for 18.5 years. For retirees in 2019, that drops down to just 13.5 years.
There is no doubt that the investment environment moving forward is going to be significantly more challenging than it has in the recent past, with today’s retiree facing the prospect of some of the lowest returns in living memory.
What retirees can do?
Still, far from waving the white flag, in our view there are some things investors can do to improve their prospects.
With traditional strategies returning less in today’s environment, retirees will now more than ever reap the benefit of a good adviser. Three investment strategies which could help manage the situation are:
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Retirees can seek higher returns from active management. By finding managers who can outperform the market, retirees can give their returns a boost that may go some way to offsetting the impact of lower market returns.
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Retirees can also employ a dynamic asset allocation approach in their diversified portfolio. Dynamic asset allocation seeks to navigate the market cycle and gain exposure to asset classes that are delivering the most attractive returns. By dynamically managing their exposure to different asset classes through the cycle, retirees may be able to secure more attractive returns and better manage risk compared to a traditional ‘buy and hold’ strategy.
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Retirees could consider increasing their exposure to alternative sources of return that aren’t linked to bond and equity markets and aren’t likely to suffer as badly from the low-return environment.
Additionally, retirees will benefit from an effectively constructed portfolio that minimises waste, such as transaction costs, and maximises structural advantages, such as access to franking credits.
Unfortunately, there is no magic tonic for the situation and retirees should be wary of anyone claiming to have one. However, by partnering with a good adviser, managing their expectations and positioning their portfolio for a lower return future, they will be in the best possible position to thrive.
Author: Darren Beesley, BCom FIAA, Head of Retirement and Senior Portfolio Manager, Sydney, Australia
Source: AMP Capital 9 Oct 2019
1 Based on an expected 10 year return on Australian government bonds equal to current 10-year bond yield of 0.9% and expected return on equities of 8.9% based on a historical regression of 10 year returns against starting Cyclically Adjusted Price/Earnings Ratio of 20.3
2 As defined by ASFA’s retirement income standards
Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.
How direct real estate exposure is tracking in the current market
Economic conditions, including falling cash rates at home and abroad, are prompting investors to shake up their asset allocation. This is having an impact on allocations to direct real estate worldwide.
The state of play
At its October board meeting, the Reserve Bank lowered the official cash rate by 25 basis points to 0.75 per cent.
The RBA is not alone in its fight to
Read MoreEconomic conditions, including falling cash rates at home and abroad, are prompting investors to shake up their asset allocation. This is having an impact on allocations to direct real estate worldwide.
The state of play
At its October board meeting, the Reserve Bank lowered the official cash rate by 25 basis points to 0.75 per cent.
The RBA is not alone in its fight to kick-start the national economy. Developed nations worldwide are grappling with sluggish growth and below-target inflation figures, and there’s no end in sight for the mid-term.1
“Interest rates are very low around the world and further monetary easing is widely expected, as central banks respond to the persistent downside risks to the global economy and subdued inflation”
said RBA governor Philip Lowe in his statement supporting the cash rate decision.
One well-understood impact of this lower-for-longer environment is compression of returns from traditional safe haven assets like bonds and cash. As a result, institutional and retail investors alike are on the hunt for new opportunities, and we see that manifesting in a jump in investors’ interest in direct commercial real estate.
Key market observations
In the last 12 months, commercial real estate (CRE) has delivered an average return of 4.9 per cent, placing it amongst the highest income return of all asset classes.2
Further, investors worldwide have lifted their exposure to CRE, from an average of 8 per cent in 2012 to 11 per cent today.3 At AMP Capital, we anticipate this figure will continue to rise, reaching approximately 15 per cent by 2025.
However, it’s important to note that while falling cash rates will likely prolong the real estate capital growth cycle, which is currently in its ninth year of positive capital growth, we expect yields to compress in the office and logistics space over the next 12 months, as the cost of capital falls.4
Similar patterns and projections were identified in a report from Cornell University in the United States and capital advisory firm Hodes Weill.5
Its 2018 Allocations Monitor, which includes research collected from 208 institutional investors in 29 countries, said that, on average, institutions are expected to increase target allocations to real estate by 20 basis points over the next 12 months.
Further, the research found that after two years of “moderating” portfolio investment returns, performance increased in 2017. Real estate portfolios generated an average annual investment return of 9.2 per cent in 2017, up from 8.7 per cent in 2016, according to the report.
“This is consistent with industry-wide real estate returns, which trended upward in 2017, spurred by a rebound in economic growth which led to stronger operating fundamentals (i.e. rent and occupancy trends) across asset classes and geographies,” the report said.
Notably, the report also measured institutions’ view of real estate as an investment opportunity from a risk-return standpoint, using a so-called ‘Conviction Index’. After four years of steady declines, this index moved from 4.9 to 5.1.
Interestingly, on the flipside, despite 92 per cent of institutions reporting that they are actively investing in real estate, institutions remain approximately 90 basis points under-invested relative to target allocations, the report found.
One to watch
At AMP Capital, we anticipate the cash rate will continue to fall, potentially as low as 0.25 per cent by early 2020. As a result, we expect the hunt for yields and growth to intensify, as investors search for steady and prolonged sources of income. In this context, real estate will be one to watch as time wears on.
Author: Luke Dixon, Head of Real Estate Research – Real Estate, Sydney, Australia
Source: AMP Capital 10 Oct 2019
1 Source: https://www.rba.gov.au/media-releases/2019/mr-19-27.html
2 Source: IPD/MSCI Total Return Digest, Q2, 2019
3 Source: Cornell/Hodes Weill & PwC
4 Source: AMP Capital Real Estate Research as at September 2019
5 Source: https://www.hodesweill.com/research
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