December 5, 2018 by Dymphna

This sector might be Australia’s best-kept secret.

Investors are about to become cashflow hungry. This sector could boom as a result.

With most market analysts expecting property prices to be pretty boring through 2019, we’re probably going to see a swing to more ‘defensive’ properties.

(That may or may not be true, but what the market expects, it gets.)

I’m stealing a bit of lingo there from the stock market. In times of uncertainty, the market turns towards defensive stocks – solid stocks that pay out decent dividends.

So what’s the equivalent in the property sector? What’s a defensive property? It’s a property in a solid location that’s paying out a decent rental return and yield.

Now if you’re new to property you might be wondering why anyone would buy a property that wasn’t in a solid location paying out a decent yield.

And the answer to that is growth. The majority of investors are chasing growth, and for good reason. In recent times, that’s where the big gains have been made.

And the promise of growth has had investors buying into higher-risk locations (think mining boom towns), or settling for ordinary yields (in Sydney and Melbourne, average yields are about 3%, which is not statistically different from sweet F.A.)

But the game is changing, as it always does. And with growth pockets becoming more rare and more isolated, I think we might see investors retreating to defensive properties – places where they can ride out the consolidation.

Now if you’ve worked with me, you know I like a well-located property, but I get much more excited about manufacturing growth – about properties where I can add value myself.

So I’ve never been such a ‘hot-spotter’ – I’ve never got too worked up about where the next boom-town is going to be. I keep my finger on the pulse, sure, but it’s not the be all and end all for me.

(I like to work with investments where I have control – where I’m not banking on market movements to make gains. When it comes to money, I’m a bit of a control freak like that. Call me crazy.)

Industry stalwart Dr Andrew Wilson also reckons that the market will keep moving through a period of uncertainty, and recommends investors start paying a bit more attention to yield:

“We’re going to go through a period of settlement and the uncertainty in our housing markets, make no mistake. It will accelerate until we hit sort of ground zero or rock bottom, but I don’t think we’re going to have any cataclysmic fall in price.

“The highs and lows of capital growth have always been a hook to investors. The cycle always rises on the back of speculative investors wanting to get in on higher prices but if we take that roller coaster ride out of it, residential investment offers tremendous positives in the form of yields that are highly tax-advantaged.

“If you’re an investor, you must start thinking a little bit more about the yield opportunities rather than the capital growth opportunities, which aren’t going to be a lot different from capital city to capital city. I think the era of the hotspot is probably behind us to some extent.”

But this is the thing. If we’re chasing yield, where do we go looking?

Again, there are ways to manufacture yield in residential property, but as a class, commercial property is hands down the yield king in Australia.

As a rule of thumb, yields in commercial property are two to three times what you get in residential.

There’s a reason for this. There’s a bit of a knowledge barrier to commercial property, and some serious downside if you just go blundering in with no idea of what you’re doing. (Residential is, or has been, much more forgiving.)

But still, it’s not rocket science. With the right mentoring, you can find high-yield plays that have more secure tenancies that anything you’ll find in residential.

Commercial might just be the best kept secret in Australia.

But don’t expect this to last too long. If the current soft patch extends for two or three years (I don’t think it will, but it’s an outside chance), investors are going to get very cashflow hungry.

They might start getting commercial hungry.

That means that commercial might just be the best defensive play ever. Lock in outsized cashflow returns today, cash in on surging demand (and capital gains) tomorrow.

If you’re looking for a cautious way to keep moving forward, might be worth a red-hot look.