The property type every older investor should be considering
There's one property asset class that every older Australian, retiree or retirement-focused investor should be looking at, and it is less risky or complex than most would suspect.
It’s fair to say none of us are getting any younger. In fact, like many developed nations, Australia has an ageing problem.
The latest Intergenerational Report[1] points to our ageing population as one of the major forces set to impact the Australian economy over the years ahead.
The stats say it all.
Over the next 40 years, the number of Australians aged 65 and over will more than double. We’ll have three times as many people aged between 80 and 89. And not to be outdone, the number of centenarians is expected to increase six-fold.
Put differently, over the next decade, an estimated 800 Australians will retire every day[2].
The downside of superannuation
As the Financial Services Council points out, this ageing trend represents a seismic shift in wealth, as three million Australians switch from growing their superannuation, to drawing on their fund as a source of income[3].
I am a fan of superannuation as an investment that allows many Australians to grow a retirement nest egg. But it’s not without problems.
As the Retirement Income Review notes[4], it is common for retirees to worry about exhausting their superannuation prematurely. This sees many stick with minimum drawdowns. As a result, these seniors enjoy a lower standard of living, and pass away leaving the bulk of their wealth as a bequest.
Fortunately, there is a solution that can allow retirees to enjoy the best of both worlds – earning strong, regular income to live on, combined with the potential for capital growth.
Commercial property is well-suited to retirement income
Commercial property has a well-deserved reputation for delivering high ongoing yields. Data from Colliers[5] shows Q2 2023 rental yields on the main classes of commercial property were:
- 27 per cent industrial property
- 79 per cent office property
- 75 per cent retail property
That’s a lot higher than 3.8 per cent rental yield for residential property[6].
It’s important to note of course that all different asset classes carry different risks and that’s a key investment decision criterion that all investors should consider.
What is particularly appealing about commercial property as a retirement investment, is that in commercial lease arrangements it is the tenant who usually pays many of the property’s outgoings. This gives investors a more generous ‘net’ (after costs) yield.
By contrast, in a residential tenancy the property owner pays for the bulk of expenses. This can see a ‘gross’ yield of 3.8 per cent whittled down to a net (after costs) yield of around 2.5 per cent.
Commercial property – minimising the downsides
Like all investments, commercial property does have risks, including the possibility for extended vacancies.
This risk can be managed by investing in quality properties in prime locations that attract successful businesses – notably multinational or ASX-listed companies.
The problem is that these sorts of properties are priced well beyond the reach of most individual investors.
Here too there is a solution.
Instead of owning commercial property directly, it can make more financial sense to invest via a managed property fund.
This strategy lets investors pool their capital to purchase quality commercial assets, often leased to blue-chip tenants. Investors can benefit from the high yields of the underlying property(s), while being confident the fund manager is implementing strategies to enhance unit-holder returns – both yield and capital growth.
Unlike superannuation, which often has a strong bias to listed equities, an unlisted property fund is not impacted by sharemarket volatility. This is a very appealing aspect of property funds for retirees, who are always keen to preserve the value of their capital.
Long story short, as our population ages, commercial property offers an attractive way for the growing numbers of retirees to benefit from both worlds – enjoying high-yield passive income to support a decent lifestyle, while having the potential to pocket a capital gain when the underlying properties are sold.
[1] https://treasury.gov.au/publication/2023-intergenerational-report
[2] https://fsc.org.au/news/measure-supers-success
[3] https://fsc.org.au/news/measure-supers-success
[4] https://treasury.gov.au/sites/default/files/2021-02/p2020-100554-udcomplete-report.pdf (page 191)
[5] https://www.colliers.com.au/en-au/countries/australia/quarterly-snapshots
[6] https://www.corelogic.com.au/__data/assets/pdf_file/0018/17523/CoreLogic-HVI-Sep-2023-FINAL.pdf
