Interest rates have fallen dramatically in recent years, which means borrowing costs are low for property investors right now.

Investors, in turn, have been happy accepting lower investment yields. This has pushed up property prices and the result has been a good run for the property market.

But we’re nearing the end of this lower interest-rate cycle. In the US, mortgage rates are already rising, although New Zealand rates will probably remain static for another year.

On the face of it, buyers should be wanting a higher yield (return on investment), which would push property prices down. A property yield is calculated by dividing the annual rental income by the property’s value.

Hand in hand with rising interest rates is rising inflation, which can be good for property investment. Higher inflation means higher rent, which in turn increases the yield on a property.

Rents on commercial property are often linked to inflation. For example, a lease could state that the rent is increased each year by the rate of inflation, plus 3 per cent.

Diversify within property investment

If you want to invest in property and maintain a diverse portfolio, it’s worth remembering that: New Zealand’s a tiny market in global terms.

• Residential property is only one of many ways to invest in property.
• Investing in New Zealand residential property doesn’t provide true diversification, particularly for investors who’re already in the market because they own their own homes.

One way of diversifying within property investment locally is to buy New Zealand-listed property stocks. Listed property companies can fix their borrowing rates at current low levels.

And rather than residential property, these can offer office, industrial, and retail assets. But these investments are all within the same (small) geographic area.

The real-estate mantra ‘Location, location, location’ doesn’t mean you should have all your property investment in one country.

The answer is to invest in international property companies.

As well as providing geographic diversification, these offer exposure to many different property types. In the US and Europe, international property companies can include storage units, data centres, cell phone towers, and forestry. Now that really is diversification!

Smooth out returns

For New Zealand investors, returns over the past five years from listed property funds have typically been around 8–10 per cent a year. Over a one-year period, US property stocks have performed poorly, but at the same time many other countries have risen 10–15 per cent.

The advantage of diversification is to smooth out the difference in returns and reduce your reliance on just one market.

Sustainable buildings

Many overseas property companies are now focused on the environmental and social impact of their buildings. They’re striving to be energy self-sufficient through solar power, to increase heating and lighting energy-efficiency, and to provide healthier physical work environments (through improved air circulation, for example).

A quality building that includes sustainability features attracts better tenants and higher rentals, and it’s easier to sell.

Investing in international property

Investing in property in New Zealand directly (usually through a real-estate agent) is relatively easy for an investor who has their finance lined up. But it’s a more difficult task for overseas property. It’s harder to view properties, know the best locations to buy, arrange a bank loan, and then do maintenance on the building once you own it.

The other disadvantage with owning property directly is that you can’t sell it and cash up quickly – the process can often take months.

For international property, other options are available. One way of investing is to buy stock-exchange listed property stocks in the US, Europe, or Australia.

For those who don’t want to use a share broker, the alternative is a global-property fund, which in turn invests in shares of international listed property companies. These investments can be cashed up within days and offer true geographic diversification.

Definition:

Diversification: Diversification is an investment strategy that is applied to reduce risk to any one type of asset by spreading investment capital across a variety of assets. The overall effect is that volatility within the total portfolio is reduced and returns are smoother.

First published Autumn 2018

Story by John Berry

John Berry is co-founder and CEO of Pathfinder Asset Management, which is a responsible investment specialist. Pathfinder is manager of the Pathfinder Global Property Fund.

The editorial above reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.