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The Great Income Chase

One of the most significant triggers in the hunt for investment yield in global share markets has been the monetary policy of central banks.

In many markets around the world, interest rates have been purposefully lowered to record low levels. In this article we look at what the central banks are trying to achieve with their actions and why this has led to the ‘great income chase’ for many Australian investors.

With a great deal of enthusiasm, professional investors spend many of their days scrutinising the actions of central banks.

Investors primarily focus their attention on the US Federal Reserve (US Fed), the European Central Bank (ECB), the Bank of Japan (BoJ) and the People’s Bank of China (PBoC). Locally, they place a great deal of weight on the actions of the Reserve Bank of Australia (RBA).

The monetary positions fixed by these banks set the tone for capital flows around the world and underpin much of the activity in global markets and currencies.

Follow the (US) leader

In 2015, two of the four major central banks – the BoJ and ECB – adopted extraordinary (and unconventional) measures to ease monetary policy. While going about it in slightly different ways, both have essentially adopted the lead of the US Fed, which began what it called ‘quantitative easing’ in late 2008.

In addition to setting very low interest rates, these banks have been buying large volumes of assets, essentially flooding their financial systems with cash. For its part, the ECB has even adopted negative official cash rates for certain deposits, inspiring a proportion of the European sovereign government market to trade on negative yields. This means that some European governments, and even some of its most creditworthy corporates, are actually being paid to borrow.

Looking ahead, the US Fed has announced there will be changes to its current policy. It has stopped buying assets and will look to raise interest rates at some time in the future. What keeps investors guessing, however, is when the rate rise will come and how fast and/or how far rates will rise.

In China, the PBoC continues to run relatively tight monetary policy in order to control asset bubbles and rebalance the Chinese economy.

What low rates mean for investors

Very low interest rates mean that low risk investments, such as savings and term deposits, effectively offer investors only low returns. This can make things difficult for investors, particularly those in retirement who may be looking for stable and relatively predictable returns.

The flow-on effect is that low rates increase the attractiveness of other, more risky, assets. This is one of the reasons that central banks lower rates; it helps encourage borrowing and investment in business, as well as fuelling consumer demand.

Low interest rates are generally good news for share markets, as investors are drawn to them because of the prospect of greater returns. However, these markets can also be subject to significant volatility.

In 2015, European and Japanese equity markets have been among the world’s best performers. But in the US, with rates tipped to start heading the other way and a relatively strong US dollar, the edge has started to come off that market’s growth. The Chinese share market has also boomed this year, even as its property market appears to be deflating.

Australia and many local investors are caught in this global maelstrom. A strong US dollar and slowing Chinese demand for resources has affected many mining stocks listed on the Australian Securities Exchange (ASX). Growth in Australia has slowed and, increasingly, market participants are looking to the RBA to cut rates further to stimulate the local economy.

The great chase for income

With interest rates in Australia already at record lows, many investors are looking to alternative places to generate returns. This is particularly true for retirees and self-managed superannuation trustees who have often sought regular income payments from term deposits and bonds to support their lifestyle in retirement.

The ASX and residential property are often popular choices. But many investors are uncomfortable with the risk and volatility in these assets. With residential housing, there are different issues at play, as house prices have boomed in recent years and rental yields are relatively low.

One asset class that is often overlooked in the search for income is unlisted property funds.

Unlike residential property, an investment into an unlisted property fund can provide access to large-scale commercial property assets that most investors would struggle to otherwise invest in. It can also provide much-needed diversity across tenants, geography and property type.

Another characteristic of unlisted property is that its return profile is typically less volatile and more stable than investments listed on the ASX. Income distributions from unlisted property funds are generally made from the ongoing rental payments of tenants.

However, it should also be noted that unlisted property is also typically less liquid than ASX-listed investments, and generally only suitable for those with a medium to long-term investment timeframe.

Australian Unity Real Estate Investment is the property funds management business of the Australian Unity Group. Established in 1998, AUREI today owns and manages more than 50 properties in the healthcare, retail and commercial sectors across Australia, which are collectively valued at more than $1.6 billion (at 31 March 2015).

Combining investment expertise with the insights from the broader Australian Unity Group, we’re able to provide a deeper perspective into commercial property markets and deliver this in a straightforward and transparent manner.

More information about the unlisted property funds managed by AUREI can be found at australianunityinvestments.com.au.

Ryan Banting is the Head of Portfolio Management at Australian Unity Real Estate Investment.

Australian Unity Investments offers investors a variety of unlisted property funds. These cover assets including healthcare, office, retail and industrial property.

For more information about our unlisted property funds, refer to australianunityinvestments.com.au. To find out whether an SMSF is right for your investment circumstances, please consult a professional financial adviser.

Important information

This article contains general information only and should not be construed as investment or financial advice. Any examples or information provided in this article are for illustrative and discussion purposes only and do not represent a recommendation or Australian Unity’s view on future events.



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