The Australian Federal budget last month may have been a big surprise, and investors need to adapt to how they invest in property and other assets.
Changes to negative gearing may make residential less appealing to investors wanting to offset wages and other income.
Of course, we shouldn’t forget that grandfathering arrangements remain in place for residential property that was already owned, buying new builds can still allow rental losses to offset wages and other income, and rental losses on newly-bought existing properties can offset future profits from that property.
But, the capital gains tax changes may make residential property less appealing to investors.
Having said all of that, I can understand why some investors are now not as enthusiastic about residential property as before. But, I don’t believe Australians should ignore property entirely.
There’s one area of the property market I’m very optimistic about for the long-term: real estate investment trusts (REITs).
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Why REITs are my go-to for property investing
Commercial properties are a huge class of assets that allow investors to buy real estate across industrial warehouses, shopping centres, office buildings, storage units, farmland, childcare centres, medical buildings, hotels and pubs, service stations and so on.
A typical REIT generates compelling rental profits each year, allowing it to pay a sizeable distribution to investors. It’s the opposite of negative gearing – we can receive pleasing payouts while (hopefully) watching the real estate go up in value over time.
For me, it’s most appealing to look at areas of the market that are seeing positive, sustainable rental growth because that’s what will fund higher distributions and increase the value of the properties.
It could also be a good time to look at the sector because higher interest rates are a temporary headwind, but falling interest rates could turn into a tailwind.
My picks in the sector
I particularly like the REITs Centuria Industrial REIT (ASX: CIP) and Dexus Industria REIT (ASX: DXI). They are experiencing strong rental growth thanks to demand areas such as e-commerce, the onshoring of logistics/supply chains, and data centres.
Rural Funds Group (ASX: RFF) is another favourite of mine because of the exposure to farmland, its contracted rental income, the long-term contracts with tenants, its ability to invest in farms to improve the productivity for tenants, and the reliability of its payouts.
Each of the above property options has distribution yields of more than 5%, which I’d describe as very compelling, in my opinion.
I also really like Charter Hall Long WALE REIT (ASX: CLW) because it has a diversified portfolio across a number of subsectors – I think it’s an effective way to invest across the Australian commercial property world. It has clients signed on for the long-term and expects to pay an annual distribution yield of 6.8%.
But REITs are just one area of the ASX of course, there are plenty of other ASX shares that could deliver even stronger returns.