The economic environment continues to fluctuate, with rates rising and talks of a recession in markets close to home such as the US and New Zealand. As the Reserve Bank of Australia has stated, higher consumer prices, rising interest rates and declining housing prices are set to weigh on growth in 2023.
Times like these tend to make some investors slow or pause investing, to instead store away savings and maximise cash flow in anticipation of times of need. RBA governor Philip Lowe recently noted that a large number of banknotes have disappeared from circulation, likely being held as a store of value.
Cash under the bed or even earning bank interest loses value in a higher inflationary environment. If we’re letting our money sit somewhere, why not let it sit in an environment that will automatically put it to work and generate above inflation returns? In a time of volatility, we need, more than ever, a considered strategy for investment.
1. Put your money to work
Fixed income investment is an investment approach focused on preserving capital and income. Fixed-income investments include products such as government and corporate bonds and hybrid securities. They provide regular income compared to ordinary shares, with the opportunity to profit from interest rate movements. Allocating fixed income as part of your diversified investment portfolio can play a vital role in managing your total portfolio risk.
2. Choose Fixed Income investments that have a higher yield
In the world of investment, you hardly ever get the best of both worlds. You either risk a lot to earn a lot (i.e. non blue chip equities) or you risk a little to earn steadily but minimally. (ie. interest-earning cash in the bank.)
But is it possible to find an outlier in this positively correlated relationship between earnings and risk? The answer might be higher-yield fixed-income investments, say in the range of 9 -15% per annum. Generally, these ranges reflect risk of 9% for the first mortgage-backed and higher for the second mortgage or preferential equity. Inflation could undermine fixed-income investments with a lower yield. With a higher yield, inflation won’t catch up as easily.
3. Opt for solid weighting assets
Fixed Income Securities can also be backed by real estate assets that are expected to grow over time. The best thing about real estate-backed investments like this is that they are secured by real assets. So if anything goes wrong, the fund can generally sell the property and repay mortgage-backed loans and it can do that before any other creditors of the borrower are entitled to be paid. If this situation were to occur, the order of repayment would depend on where the property fund ranks in the property capital stack. Understanding how a property developer distributes cash flow in each layer of the property capital stack will help you evaluate if the intended return is worth the risk you take on.
It is worth noting that while risk decreases as you move up the capital stack, so does the potential return. There is no “good” or “bad” position within the stack, as long as you are aware of the potential return compared to the risk.
Queensland suburbs are becoming increasingly popular for residential development projects of this nature due to their ample space and stellar community planning. Carrara, QLD is one of Australia’s highest-growth suburbs, with 37.4% capital growth last year and a rental yield of 5.4% per annum. VentureCrowd’s property fund opportunity for this suburb is set to change the face of Carrara, with 80% of the land being rehabilitated as a public conservation space, planting an estimated 50,000 trees and plants and installing nesting boxes for native birds.
Similarly, Glenvale in Toowoomba, QLD is a rapidly emerging rural community zone. The region has seen steady population growth over the last few years and is expected to grow by 1,700 new residents each year over the next decade. As a result, over $13 billion of planned infrastructure is set for the region. Our own property opportunity for the area has already raised $20 million.
Ventures that back solid-weighting assets are another example. For example, PublicSquare is a rent-to-buy startup that helps people buy a house by renting first and buying it when ready. PublicSquare buys the property that their clients have chosen, allowing them to move in immediately and start paying weekly offsets to eventually own the house.
PublicSquare essentially takes the risk if interest rates change because contract terms are fixed, giving investors protection against rate hikes, at least until they are ready to buy and need to secure a mortgage.
The economic outlook for Australia and the wider global economy is choppy. Interest rates are rising, consumer and business confidence is weakening, and markets are jittery. For many people, finding more predictable inflation-fighting, yet secure investment vehicles, such as fixed-income investments, could be a wise option in the months ahead.
By David Whitting, Head of Property, VentureCrowd
This article was first published by Business News Australia