4 Ways to Invest in Property with Rising Inflation & Interest Rates

Traditional and direct property investment has long been a cornerstone of the Great Australian Dream. But, with the current state of the economy you may be looking for alternative ways to enter the property market.

Of Australia’s approximately 10.7 million residential dwellings, around 3.3 million are rented and 8.8% of the population – 2.2 million people – are property investors, with 90% of these owning one or two investment properties.

Assisted by tax-effective strategies including negative gearing, property investment has historically been an attractive way to invest. But with rising prices, inflation, interest rates, and hikes in the cost of repairs and maintenance, it has become more difficult to enter into this type of investment and turn a positive cash flow.

So, in times of higher interest rates and short-term declining values, what are the other options for starting your property investment journey.

1. Real Estate Investment Trusts (REITs)

REITs expose investors to the property market through ownership of shares in companies that invest in property. Similar to managed funds, REITs are actively managed and pool investors to invest in properties. REITs typically invest in income-producing properties such as offices, industrial, shopping centres, medical, aged care, student accommodation, Build to Rent (BtR) and hotels. Australian Real Estate Investment Trusts are known as A-REITS and are traded on the ASX.

Investing in REITs can suit investors who don’t want to take out a mortgage and other costs involved in maintaining a physical investment property. They also enable people to invest in smaller amounts. REITs also offer more liquidity than traditional property ownership, as investors can buy and sell their shares at short notice.

Investors can also earn a share of the income generated by tenants through dividends which may be more tax effective when passed through to investors. REIT investment platforms offer greater diversification, although this diversification can mean that average-performing properties offset those that perform well.

REITs form part of the listed market and there are risks that come with that. It is common to see the value of a REIT sitting below the actual value of the property assets it holds if it liquidated them because it is also subject to the vagaries of the equity market irrespective of the value of its property holdings. This type of investment also does not insulate investors against the effects of inflation.

COVID has impacted rents for some REITS with tenants moving increasingly to work from home and companies reducing space. On the other hand, the increased demand for warehousing and home delivery has benefitted some types of properties.

2. Exchange Traded Funds (ETFs)

Like REITs, ETFs are traded on the stock market. ETFs may invest in different REITs, builders and developers. The security of diversification of ETFs may be offset by underperforming sectors in a portfolio, but the investment is highly liquid.

Many of the same benefits and risks that apply to ownership of equities in REITS also apply to ETFs.

Related article: Highest Return ETFs in Australia

3. Property crowdfunding and Fractional investing

With property crowdfunding and fractional investing, numerous investors contribute small (retail) or large (wholesale) amounts through a platform which vets the investment, project or financial product related to a property product.

A crowdfunding investment, usually in the form of units in a unit trust, may provide ownership of direct property and its returns, or may be an investment in a financial product, for example, a first mortgage with an agreed interest rate.

In fractional investing, you usually obtain a portion of interest in actual property.

Pooling funds from numerous investors can make property investment more affordable and is usually undertaken by professional property developers, investors and expert consultants who vet the particular project. Investors might be able to enter the property market with as little as $100 or $1,000 depending on the platform.

Investors can receive returns in a number of ways. They may receive monthly or quarterly interest or distributions, and returns associated with any growth in capital when the property is sold, or a combination of the above. Products are varied and reflect the risk-return component of the capital stack. If you invest early in equity, one would expect higher returns and less security. If investing later in the project with a debt product, returns would be lower but you would expect to be backed by a first or second mortgage providing additional security for your investment.

4. Find the hotspots

No matter which approach you choose, it’s important to understand the cyclical nature of property values and how certain markets compare. For example, South East Queensland’s property market boasts quality properties that are far more accessible to the average Australian investor than Sydney and Melbourne equivalents. In fact, Queensland offers one of the best markets in the country according to research by PropTrack. 50% of properties were cheaper to buy than rent, especially around the south and southwest suburbs of Brisbane CBD.

With remote working continuing, the rise in numbers of people seeking a tree or sea-change, combined with the Brisbane 2032 Olympic Games providing a Sydney Olympic value thematic, South East Queensland is likely to outperform most other Australian markets, and remain stronger for longer.

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The Great Australian Dream need not be abandoned despite individual direct property investment likely to get more challenging in the next few years. There are alternative ways to invest with both active and passive investment choices at lower entry points, better diversification and liquidity, with experienced developers or asset managers.

Main image source: Jaaske M (Shutterstock.com)