Don’t get caught out chasing the yield
During times of market instability, with so much noise, it may be tempting for investors to narrow their focus to datasets that are easy to parse. But experts agree it’s a mistake to put all your eggs in the “yield” basket.
On a recent podcast episode of Investing Insights, Smart Property Investment’s Phil Tarrant, alongside Right Property Group’s Steve Waters and Victor Kumar, discussed why focusing solely on yields can obscure the truth of whether your purchase is a smart one.
With the exuberance of the market severely dampened and the future of interest rates somewhat uncertain, Mr Kumar explained that some investors are struggling to read the market and are “chasing the yield” without fully understanding whether the purchase will stand the test of time.
He explained that some investors are “seeing ‘higher interest rate’ and they are now starting to focus on just the yield rather than the full fundamentals of the property”.
“So a lot of the uninformed and perhaps poorly informed investors that will buy at this point in the cycle where there are conflicting signals — some markets going up, some markets going down — may have bought purely on the yield scenario not necessarily taking the full growth factor or the liquidity of the property into play,” Mr Kumar said.
These buyers, he said, are generally those who might find themselves having to sell down at a later date because they haven’t seen a result within a couple of years’ time.
“They’re not understanding that growth in itself cannot be linear; it’s got its ups and downs. We need to understand with each state what the general cycle is from the bottom of the market to the peak. So as an example, Sydney would be three to five years. Melbourne’s cycle is three to seven years. Brisbane comes in at seven to 11 years,” he said.
A fundamental knowledge of market cycles is important, Mr Kumar said, and then investors have to be prepared for the unexpected, such as the massive global event that has impacted markets worldwide.
“When we throw in COVID factors in there, in terms of how it’s changed our demography, how it’s changed the way we work, how it’s changed where we live, those normal patterns may get disrupted in the immediate future,” he noted.
Knowing when to sell can then be hard to judge, and while cities with shorter cycles might offer more opportunities to catch the right timing, getting the timing wrong in a city like Brisbane is “asking for trouble”, according to Mr Kumar.
If you’re not also evaluating how the property fits into your portfolio and how your portfolio will track with the market cycle, you’re getting into risky territory, he advised.
Mr Waters agreed, explaining that poor choices may not reveal themselves in the short term but that, eventually, they will come to light.
“I think over the short term, there’s going to be quite a lot of masking. And what I mean by that is because of our undersupply and the construction issues that we continually have, that very low vacancy rate will temporarily mask what will be an underperforming asset over the medium to long term,” he noted.
The numbers, the duo said, may look good on paper, but they need to be verified by what’s happening on the ground.
“One of the trends that [have] started to emerge over the last couple of years is a reliance on desktop data,” Mr Kumar went on to explain.
He gave a concrete example of how risky that can be.
“We have a lot of vendors out there saying, ‘You know what? I’ll hold onto my property a little bit longer. I won’t take the first price that comes my way. I’m going to hold out to get what I want on my property.’ Now, the flow on of that is it impacts what a lot of people use as metrics to see whether the market is cooling.
“Because vendors generally know that they can actually get the price that they want, the property is now sticking on the market for, say, two, three, four, five weeks longer for the market to come and meet the price they want. And so, correspondingly, the days-on-market metric blows out,” Mr Kumar explained.
Novice investors relying purely on desktop data would see that change and assume that properties are spending a longer time on the market because there isn’t demand, missing the fact that the market may, in fact, be home (as many currently are) to an extreme supply and demand issue, Mr Kumar warned.
“As we start to get away from that correlation of data onto the ground, we are going to end up with properties that are actually not good fundamental properties,” he said.
Listen to the full conversation here.