April 2017 :: Market Updates
Demand for Industrial Investment exceeds supply due to interest rates.
While demand is high for investments, supply of those wanting to sell investments is very low.
Given the low interest rate returns currently offered by banks, the demand to place money into income-producing industrial investments (as well as other property asset classes) has never been higher.
This demand comes from almost every spectrum of the market, including:
- Small private investors in the $500,000 to $1 million market
- Medium private investors in the $1 to 3 million market
- Larger private investors in the $5 million to $20 million market
- International buyers who can invest any of the amounts above
- Major buyers — typically larger superannuation funds interested in major acquisitions in the local market including purchasers from other major super fund groups or larger private portfolios.
While demand is high for investments, supply of those wanting to sell investments is very low. With demand far outstripping supply, many see no point in selling.
A common question is ‘What would we do with the money if we sold?’
While this a good question that is not easy to answer, some investment owners should consider selling. For those investors who are highly geared, it’s a fantastic time to sell at likely record prices and reduce debt to the right or desired level. Most people believe that interest rates will continue to rise. It has been reported that banks are factoring in a two-percentage point increase in interest rates over time.
Here’s an example of what could happen if interest rates increase by 2 percentage points:
Say a property is currently worth a 7% return and the current income is $100,000:
$100,000 ÷ 7% = $1,428,571 return.
If interest rates increased by 2 percentage points — and therefore buyers adjust their buying to say 9% — the situation would change:
$100,000 ÷ 9% = $1,111,111 return.
That is a 20% drop in capital value! The income has not changed but capital value has.
Times of low interest rate times are more dangerous than times of high interest rates.
For example, take the average person with a home loan of 5%. If the interest rates go up by one percentage point to 6%, that’s a 20% increase of the repayment on 5%.
If the average home loan rate was 10% (a more normal rate historically), then a one-percentage point increase to 11% results in only a 10% increase in the repayment.
For home owners already stretched, a 20% increase in home loan payments is massive.
While many investors are looking to acquire property because of low bank returns (which makes good sense), other investors feel interest rates have reached a likely minimum and this may well be the golden opportunity to go counter-cyclic and sell at top dollar while demand is very high and be cashed up for bargains down the track.
History has often shown that going contrary to the prevailing market trends reaps results. Time will tell!
