Return to Yield

Who wants to be holding an asset running hundreds of dollars a week in negative cashflow with the potential for significant capital losses?

Not really interested in starting ANOTHER coronavirus thread, but could the current environment see a return to more interest in yield (or perhaps development / renovation), rather than speculating on capital gains?

As recent as the past few weeks I am sure I could find threads where it's all about capital gains, capital gains, capital gains, but periods like we are going through now, especially if prolonged could result in a big shift in investor mindsets.

 

I think its very possible. The reason why yields are so low is because of the property asset bubble. Asset price surges are driven by cheap debt, where rents are locked to wage growth. Tenants can't simply go to the bank and borrow increasingly exuberant amounts of money to pay rent, like property owners can.

Widespread unemployment is likely to pop this bubble, and with a haircut in property prices we should see yields return to what they were say 20 to 30 years ago.

 

Possibly if this continues to play out the way it does. Low cost of debt will shield it a bit so depends how bad unemployment/non payment of rent goes. Mind you if Aus had 1% interest rates like HK did, it's pretty had to go cashflow negative.

 

My experience over the last 6 months says they already are/were and this will continue. I have a growing number of investors who are "5% and over only please" type folks. The stock is rare in decent locations but there if you know what to look for or are willing to roll up the sleaves.

 

Well yes, I think I could see property investors seeking greater yields but necessarily from property.

 

100%. Good to mitigate risk

 

How can the HK banks lend at 1% when they are paying 1.69% on term deposits ?

 

Net Yield after expenses 11.16% $694k
Funding cost 3.5%
So 69% of the net rental is profit

25 Pandora road Napier NZ

 

Yields have always been in fashion for me
Some of my purchases made 22 years ago are now yielding 40+% on purchase price

 

perhaps in the future?? Who knows. In the main I see property investors as not too interested in being active investors, requires more risk and work.

but adding value via developing etc today will I expect be high risk

i was days off signing with my builder, but way too nervous to go ahead with this project

 

Currently paying 2.65% on my HK apartment

 

That’s pretty pricey. I was paying 2% even back in Dec with BEA and 2.3% on industrial with DS. Now there’s a series of cuts. Back 6-7 years ago was around 1% also... who you with?

 

I just checked and it's 2.5% with BOC

 

Yea I don’t borrow with big banks.

Also what type of loans you looking at. Mine are all P+ not H-. I noticed H- is higher (typo)

 

I’m not sure it will. In fact, without thinking too much about it, I’d say the reverse will occur.

Overall property investors are looking for returns, yield is part of that return and weighted a bit higher (given its present value and doesn’t need to be discounted vs future returns at a discount rate).

1. In general, greater yields come with greater risk. I.e move to lower priced point/lower socieeconomic areas, and yields rise. Investors should theoritically would want a bigger risk premia now on lower quality assets given the greater risk of rent being realised in today’s market.

2. Net yields will likely fall through a crisis like this. Ie fewer people will be able to pay rent and the gov’t is unlikely to compensate investors (reading current news, more likely to ask investors to be involved in footing the bill). This would be weighted towards higher yield properties unfortunately (I think, but not too sure).

3. interest rates are so low, that there’s not much that’s negatively geared! Some of Sydney’s finest suburbs will be positively geared now.

Overall, in crisis conditions, I think behaviourally investors will fly to quality (blue chip), not risk. That typically means what traditional PC investors categorise as growth properties, not yield.

If looking a bit wider to get a sense of behavioural responses, So far, financial assets have seen a run from yield/risk assets to low yield/low risk assets. Ie investors are asking to be compensated with higher yields given the risk profile of these assets are now greater. I.e. investors are questioning if yield will be delivered. Same may go for property.

 

Yes, I don't think so either. No need to chase yield when the cost of capital is so low. When your borrowing at 2.5% the hurdle for returns is pretty low.

 

The rate is the lesser of HIBOR + 1.23% and 2.5%. I think 2.5 is better right now

 

Sorry I swapped H and P around, but it's H+1.3 or P-3.2
I wasn't even shopping around, I just went with whoever my friend recommended

 

All well reasoned points, but on this one, I would suggest those with properties in areas where rent is being paid entirely or mostly from government benefits may be lower risk (in some respects) in the current climate and that may be the case for some time to come. I bet there are a lot of investors who wish their properties were affordable to those on the pension and other government benefits.

Right now I would much prefer to have 4 x $250k properties in Adelaide with 5-6%+ yields (with 4+ income streams) over a $1m property in Sydney with a 3% yield (where a single income earner losing their job could result in no rental income).

Maybe I am in the minority.

 

Agree, but just to think your comments on holding property in Adelaide over Sydney would have been laughable not so long ago, not today though

most investors will be in survival mode, just brings it home the importance of cashflow and debt/lvr.