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The yields v growth conundrum facing investors
According to one expert, despite investors’ best efforts, there is no way to balance yield and growth.
Deciding between yield and capital gains has been a never-ending battle for investors looking to grow their portfolios, and the interaction between the two has been evident in recent months, with yields rising as dwelling values softened, according to data from Cotality.
HtAG co-founder Dr Mat Djolic said that while the ideal investment would balance strong capital growth alongside rents or cash flow, buyers would have to choose based on their priorities.
“You can’t have your cake and eat it too. It’s the yield equation that messes things up.” Djolic said.
“Both of those metrics don’t move in the same direction at the same rate.”
While investors were always looking for assets that would outperform the market, Djolic said the timeframe of growth needed to be considered.
Djolic said investors needed to identify what their personal brief was and then use that knowledge to inform their next purchase.
“Brief is essentially four simple questions: What is your budget? What is your focus? How long do you plan to hold the asset? And are you planning to buy again?” Djolic said.
“But if you answer question number three and you say you want to hold the property for 10 years, but want to pull equity out in two, that means the area and the asset need to perform in two different time frames.”
The cost of poor choice
Djolic said that investors had to make a choice when they were purchasing an asset, as there was no such thing as a “perfect area” for an investment.
He said that once they understand how their personal brief will shape their portfolio strategy, investors need to establish a list of priorities and ensure that the key points are being met.
Similarly, he said it was important that investors understood the negative factors at play and had their professional support explain both sides.
“When you’re explaining things to a client, don’t avoid talking about the bad things.”
“You’ve got to explain both sides and have a strategy for how to manage it.”
He said that where investors choose to buy is “hugely important” for an asset’s performance, particularly in the first five years, with only a small portion of performance dictated by its individual characteristics.
Djolic said the opportunity cost of securing a good asset rather than a great one could cost investors millions in the long run.
“If you have two areas, where area A delivers 7 per cent growth and area B delivers 10 per cent, the opportunity cost is 3 per cent. 3 per cent over a 30-year mortgage is over a million dollars.”
“That’s why it (finding the right location) matters; it is as simple as that.”
Smart investors have remained active
He said that savvy buyers weren’t getting bogged down in the market’s headline news and knew when the time was right for them to act.
Djolic said that, ideally, investors should be able to analyse and understand where growth came from, and use that information to strengthen their decision-making.
He said that investors also had to accept that it was okay to not know everything, and that leaning on the expertise of others was an important part of the journey
Djolic said that while many had held fire on their investment plans while they re-evaluated their strategy, the smart investors had remained active.
“They’re not sitting on the sidelines. If they have the capacity, they aren’t just sitting on it.”
“They understand that the budget changes have nothing to do with market structure; they just have to do with serviceability. Instead of them buying every year, now they can potentially buy every four years, because they can’t claim negative gearing.”
Listen to the full episode here
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