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Investing | 12 minute read
With Australia’s record-low interest rate sitting at 0.10%, many Australian mum and dad and SMSF investors are struggling to find income in a ‘lower for longer’ world. This article shares insights into the current investment landscape and considerations for SMSF investors.
On 2 February 2022, the Reserve Bank of Australia (RBA) maintained interest rates at their historic low of 0.10%. Low interest rates are part of a suite of policies known as quantitative easing (QE), which are designed to support the economy through the effects of COVID-19 pandemic.
However, while the economy has bounced back quickly after each lockdown, there are clear signs a full recovery will take some time. Even before the effects of the COVID-19 pandemic, there were close to 2 million Australians out of work or underemployed and in 2020 Australia experienced its first recession in 30 years as the unemployment figure reached 2.5 million, peaking at 8%, although it has now fallen 4.2% as of December 2021.
The current investment environment is presenting several challenges for investors. So-called ‘risk-free’ assets such as cash and term deposits are generating record low, and in some cases even negative real returns. Government bond yields have plunged, and the COVID-19-driven jolt to the market saw high-yield bonds behave more like equities.
In addition, the effects of the COVID-19 pandemic have forced companies to reassess dividends and many of those who rely on banks, for example, have seen their payments reduced. As a result, investors are having to reconsider old models of portfolio construction and look elsewhere for assets that deliver regular, reliable income.
When looking for income, however, it is important not to forget the fundamental principles of investing. Even in a time of major economic upheaval, when the returns produced by all asset classes have been affected, having a diversified portfolio remains important. While it may be tempting to move up the risk curve, for example by increasing a portfolio’s allocation to equities, this can magnify losses when equity markets fall.
And at a given point in time, when one type of investment is performing poorly, another is often performing strongly, so diversification can help to smooth out peaks and troughs. For investors who are relying on their portfolio to meet their lifestyle needs, diversification can also help to preserve capital and ensure there is not an over-reliance on one source of income.
In a market where returns from income producing investments have been impacted, property can be a valuable addition to a portfolio. Property has consistently been a popular asset class with investors seeking stable income, diversification, and some capital growth potential.
Throughout the pandemic, undoubtedly a period of significant market uncertainty, the Australian commercial property sector has continued to deliver a consistent (albeit conservative) income return of 5.0% (for the 12 months to 30 June 2021). Over ten years, the figure is more impressive, with income of 6.2% p.a. annualised and total return of 9.4% p.a. annualised, demonstrating the sector’s propensity for consistent stable monthly income with some capital gain upside.1
The most accessible and cost-friendly approach for investors to access commercial property is through ASX-listed Real Estate Investment Trusts (A-REITs) or unlisted property funds.
As the hunt for income continues, many investors are including professionally-managed unlisted property funds in the investment consideration set.
Before investing, it is important to get to know the investment manager and ensure the underlying assets will deliver the stability and income required.
When assessing a property investment, there are a few key areas to consider.
For more information about Cromwell’s funds, contact Cromwell’s Investor Services team at email@example.com.