The final quarter of 2021 originally had many states and regions emerge from Delta lockdowns as vaccination rates successfully hit critical milestones. However, optimism soon dwindled as the new Omicron variant managed to bring health orders back in place, impacting supply chains and labour markets instantly. Incredibly, this time around, Australian economic activity remained strong with household spending a key driver. This was supported by the unemployment rate falling to 4.2% and underemployment falling to 13-year lows.

The Reserve Bank of Australia, in its November Statement of Monetary Policy, had forecast GDP to grow by around 3% over 2021, and 5.5% in 2022, but at its February meeting it upped 2021 estimates to around 5% and 2022 to 4.25% showing the strength of economic tailwinds.

What does all this mean for direct property?

Undoubtedly economic activity is strong, which is good for employment and business. BIS Oxford Economics believe property sentiment is ‘healthy’, with industrial a clear sectoral winner for the year. The office sector has been challenged by the two COVID-19 waves, but with health and work-from-home orders changing, and employers wanting staff to be collaborating together again, demand for office floorspace is picking up. The retail outlook is more dependent on subsectors and location, with neighbourhood and large format centres firming, but many businesses continuing to be impacted by weak cashflow and staff shortages.

Over the last decade, interest rates have been on a downward trajectory toward near zero, which in turn has inflated most asset prices. The Morningstar data below compares major asset classes and their respective returns over the period. Out of all the asset classes, however, property has consistently proven to be one of the standouts. The data also highlights the value of property’s place in investment portfolios in helping to deliver consistent returns over the long term.

10-year asset performance across many classes

With a ten-year annualised total return of 9.5% (comprising 6% income and 3.5% capital return)1, direct property offers investors a tweak on its listed compatriot, combining reduced asset volatility and the ability to tap into stable income streams. The ability to link income (in the form of rent) to inflation, can offer a hedge to rising prices. It is this characteristic which helps property assets perform in inflationary periods.

Through the market’s ups and downs, the Cromwell Direct Property Fund has continued to pay investors monthly income of ~5-6% p.a. (annualised since inception), while generating capital growth of circa ~3-4% p.a. (annualised since inception), reflecting its true ‘real asset’ nature, instead of market whims.


While we see prices rise for goods impacted by supply chain disruptions (such as fuel, and groceries), the question remains as to how much of the price rises are transitory or baked in (like wages).

Higher inflation rates generally see interest rates rise, and major banks are now calling for the cash rate to lift off after the federal election, from the current 0.10% to circa 2% in 2023.

Inflation and interest rates naturally impact on property valuations and capitalisation rates (cap rates), but at this stage there is still room for cap rate compression as real interest rates remain negative (See blue line).

The quantum of interest rate rises may flush out heavily levered borrowers, presenting opportunities for buyers.

Australian cash rate

How did Cromwell Funds Management fare this quarter?

Cromwell Funds Management continues to deliver for investors as the settlement of the Cromwell Ipswich City Heart Trust returned 14.15% IRR since inception for Unitholders. Similarly, the Cromwell Riverpark Trust is currently seeking expressions of interest for sale of the asset, with windup likely to deliver double digit IRRs.

DPF settled 100 Creek Street, Brisbane in December, as Cromwell took home ground advantage of border lockdowns impeding the due diligence process for others, and a motivated seller. The previous owner had recently refurbished the 24-storey office tower, which is located amongst the amenities of the prized ‘Golden Triangle’ of Brisbane.

The Cromwell Transactions team and Cromwell Funds Management are currently completing due diligence on another attractive asset in South Australia which is likely to bolster DPF further.

1. The Property Council of Australia/MSCI Australia All Property Digest Quarter Ending December 2021