<p>Brisbane-based developer <a href="https://www.apartments.com.au/developers/red-co">Red &amp; Co</a> has made a striking debut on the Gold Coast, officially unveiling its $250 million COMO development in Varsity Lakes, a lifestyle-driven residential project anchored by an extensive rooftop wellness and activity precinct.</p>

<p>Having recently launched to market, construction has already been fast-tracked by <a href="https://www.apartments.com.au/builders/5point-projects">5Point Projects</a>, ensuring momentum continues on what is set to become a landmark residential address for the growing Varsity Lakes community.</p>

<p>Located at 22 Lake Street, Varsity Lakes, <a href="https://www.apartments.com.au/new-apartments/como-varsity-lakes-22-lake-street-varsity-lakes-qld-4227">COMO</a> will comprise 156 apartments across 16 levels, comprising one-, two- and three-bedroom residences designed for modern living. However, it is the project’s rooftop amenity offering that sets COMO apart.</p>

<p>[smartcode_project:default project_id=135546 project_image_fid=363510]</p>

<p>Designed as a dedicated wellness and recreation hub, the rooftop will feature a 25-metre lap pool, fully equipped gymnasium, and multiple pickleball and paddleball courts - amenities rarely seen in boutique apartment projects.</p>

<p>Residents will also have access to a sauna and plunge baths, while landscaped gardens and relaxation zones will provide tranquil spaces overlooking sweeping panoramic views across the Gold Coast skyline.</p>

<p>The rooftop precinct has been designed to function as the social and wellness heart of the development, encouraging residents to embrace an active, balanced lifestyle within their own building.</p>

<p>&nbsp;</p>

<p>[smartcode_project:default project_id=135546 project_image_fid=363512]</p>

<p>Red &amp; Co director David Laverty said the amenity offering was central to the project’s design from the outset.</p>

<p>“Amenities were at the forefront of our decisions,” Laverty said.</p>

<p>“Buyers today are looking for more than just an apartment - they want a lifestyle that promotes health, connection and balance.</p>

<p>“The rooftop at COMO has been designed to be the epicentre of that lifestyle, with a suite of wellness and recreation facilities that are quite unique for a boutique development of this scale.”</p>

<p>&nbsp;</p>

<p>[smartcode_project:default project_id=135546 project_image_fid=363514]</p>

<p>Designed by <a href="https://www.apartments.com.au/architects/bda-architecture">BDA Architecture</a>, the residences prioritise liveability, featuring spacious layouts, 2.7-metre ceilings and high-quality finishes throughout.</p>

<p>The development sits beside Bond University, placing residents within walking distance of education, retail and dining options within the vibrant Varsity Lakes precinct, including Robina Town Centre, Varsity Lakes Train Station and a range of leading schools.</p>

<p>[smartcode_project:default project_id=135546 project_image_fid=363511]</p>

<p>Laverty said the location was a key driver behind Red &amp; Co’s decision to bring the project to the Gold Coast.</p>

<p>“<a href="https://www.apartments.com.au/developments/varsity-lakes-qld-4227">Varsity Lakes</a> was a clear choice for us to invest in as it’s a lifestyle hub that seamlessly blends lakeside living with urbanity,” he said.&nbsp;</p>

<p>“Como will capitalize on this great location, delivering a project that not only creates premium homes, but a lifestyle defined by community, wellbeing, and connectivity.”</p>

<p>Red &amp; Co has delivered more than 500 apartments and townhouses across 26 projects in Brisbane in recent years, with COMO marking the company’s first major Gold Coast development.</p>

<p>[smartcode_project_cta:default project_id=135546]</p>


Joel Robinson

Red & Co unveils amenity-rich Como development in Varsity Lakes

<p>Gold Coast developer&nbsp;<a href="https://www.apartments.com.au/developers/big-projects">Big Projects</a> has secured approval for its second Mermaid Beach project.</p>

<p>The developer, currently selling <a href="https://www.apartments.com.au/new-apartments/the-frederick-mermaid-beach-2265-gold-coast-highway-mermaid-beach-qld-4218">The Frederick in Nobby Beach</a>, has secured approval for its next project just 1.5 kilomnetres up the road.</p>

<p>The new development, dubbed&nbsp;<a href="https://www.apartments.com.au/new-apartments/glenelg-residences-2462-2472-gold-coast-highway-mermaid-beach-qld-4218">Glenelg Residences</a>, has been designed by BDA Architecture and&nbsp;will have just under 100 apartments across an 11-storey building&nbsp;at 2462–2472 Gold Coast Highway, on the corner of Glenelg Avenue just under 300m from the future Mermaid Beach Light Rail stop.</p>

<p>The apartments, a mix of two- and three-bedrooms, will sit above a retail-focused ground plane and under extensive rooftop resident amenities.</p>

<p><img alt="Exclusive: Big Projects plot Mermaid Beach apartment development, Glenelg Residences" data-entity-type="" data-entity-uuid="" src="https://res.cloudinary.com/dz9xllyip/image/fetch/f_auto,c_limit,w_1440,q_75/https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/field/image/Screen%20Shot%202024-06-11%20at%209.55.04%20am.png?VersionId=z6NV4izeuvhBSSVlY6vK6TPO1LxrFeaG" /></p>

<p>BDA said in its planning submission that the project is intended to support the area’s transition toward higher-density, mixed-use living. “This project offers the opportunity to generate appropriate higher-intensity development within the future Light Rail corridor of <a href="https://www.apartments.com.au/developments/mermaid-beach-qld-4218">Mermaid Beach</a>,” the submission noted.</p>

<p>At ground level, Glenelg Residences will include eight retail tenancies designed to activate the street frontage, complemented by a basement bar offering an additional hospitality element. Above, residents will have access to a rooftop amenity deck featuring an infinity pool, hot and cold plunge spas, day beds, and barbecue facilities.</p>

<p>The architectural approach adopts a restrained material palette of brick, textured concrete, and integrated landscaping, with cantilevered concrete frames and cascading planting intended to soften the built form. BDA described the design as aiming to create “a memorable sculptural mid-rise mixed-use building” that responds to both its coastal setting and urban context.</p>

<p><img alt="Exclusive: Big Projects plot Mermaid Beach apartment development, Glenelg Residences" data-entity-type="" data-entity-uuid="" src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,dpr_2.0,q_auto:good/https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screen%20Shot%202024-06-11%20at%209.55.45%20am.png?VersionId=cpjIVBqcT_sujmo2UMWkVyLcQ7WGJHaQ" /></p>

<p>The approval comes as the City of Gold Coast continues to plan for significant population growth, with regional targets requiring more than 100,000 new high-density dwellings by 2046.</p>

<section data-scroll-anchor="false" data-testid="conversation-turn-36" data-turn="assistant" data-turn-id="request-WEB:55d7c6ac-8e6d-4881-ad49-0ed9bf66d1cc-17" dir="auto">
<p data-end="436" data-is-last-node="" data-is-only-node="" data-start="244">Big Projects, led by Matthew and John Barrett, is part of a growing cohort of developers that deliver construction in-house, providing a high level of confidence to prospective purchasers.</p>
</section>

<p>[smartcode_project_cta:default project_id=150260]</p>


Big Projects secures approval for Glenelg Residences in Mermaid Beach

<p>Sherpa Group is ramping up its investment in the southern Gold Coast by lodging a development application for <a href="https://www.apartments.com.au/new-apartments/flourish-viver-87-griffith-street-coolangatta-qld-4225">Flourish Viveré</a>, a new $350 million project in Coolangatta.</p>

<p>The move comes after the group’s $27 million acquisition of the 2,029 sqm site on the corner of Griffith and Warner Street, last year.</p>

<p>They will develop 194 apartments across a 26-storey tower, which will become Sherpa’s largest project to date.</p>

<p>Viveré will be the next chapter in the Flourish story, following closely behind Amargo, Oasis, and the Avenues in Palm Beach, as well as Symphony in Brisbane, all designed to deliver affordable housing in lifestyle-rich locations, giving locals a real chance to secure a residence close to the beachfront.</p>

<p>The HAL Architect-designed project will offer a diverse range of residences, from one-, two, and three- bedroom apartments to the premium Canopy range to luxury penthouses.</p>

<p><img alt="Vivere" data-entity-type="file" data-entity-uuid="c85f5a7e-a22f-4745-8def-400adb3c0b35" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-04-15%20at%209.53.43%E2%80%AFAM.png?VersionId=OY.chur3BPExn1exQ2q8clHqWnW_CaBi" /></p>

<p>“The Gold Coast is undergoing a period of immense growth, with more people drawn to the incredible<br />
lifestyle that’s available, leading to strong growth in property prices,” said Christie Leet, founder of Sherpa<br />
Group.</p>

<p>“Our goal at Sherpa is to ensure locals are not priced out of the market in prime locations, which is why we<br />
created the Flourish collection.</p>

<p>“Flourish Vivere will form the next chapter in our portfolio, and we are so excited to be lodging the DA, marking our first project in Coolangatta.”</p>

<p>A signature of the Flourish developments is the communal rooftop. Flourish Vivere will showcase a private resident’s lounge, outdoor dining with barbecues and pizza ovens, heated pool, fully-equipped gym, and a wellness centre with sauna and steam room.</p>

<p><img alt="Vivere" data-entity-type="file" data-entity-uuid="c09372cc-aae6-4458-af2e-f291bd19a5e5" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-04-15%20at%209.53.49%E2%80%AFAM.png?VersionId=Sc_RLXl5jiff.tnadogXjQJ_WIpDjf3p" /></p>

<p>The project is strategically located to offer a walkable lifestyle, with the Strand shopping centre, cafes, restaurants, shops and the beach, all just a short stroll away.</p>

<p>“We have meticulously planned Vivere to build on the Flourish legacy, creating a truly special project,”&nbsp;Leet added.</p>

<p>“Wellness, lifestyle and community are at the forefront of every decision we make, and that has not<br />
changed for Vivere.”</p>

<p>With the DA now lodged with the Gold Coast City Council, Sherpa has moved quickly to secure LPS Group as the builder, offering buyers a level of certainty that is rarely seen in today’s market.</p>

<p>Sherpa has delivered 16 residential projects over the past seven years with a pipeline of $1 billion, with more under construction.</p>


Sherpa takes Flourish brand to Coolangatta, lays plans for Flourish Vivere 

<p>S&amp;S Projects is boosting its investment at Rainbow Bay to more than $1 billion after the prolific Gold Coast developer acquired a new site for $20.25 million and immediately laid plans for a new luxury apartment project in the sought-after precinct.</p>

<p>The site, which is the company’s fifth acquisition at Rainbow Bay in the past four years, will be home to the company’s largest project to date after delivering 3 sold-out projects and construction progresses on Radia worth a combined $215m.<br />
S&amp;S Projects is currently finalising plans for its latest strategic acquisition, a 1,518 sqm site located 209-213 Boundary Street in Coolangatta, with a development application expected to be lodged within weeks.</p>

<p>The luxury residential development will build on the company’s highly successful projects at Rainbow Bay, comprising Flow, Awaken, Esprit and Radia, with Radia currently under construction by Hutchinson Builders.</p>

<p>“We have been unflinching in our commitment to Rainbow Bay and the transformation we have helped drive in this incredible part of the Gold Coast, which is among the city’s most desirable residential locations,” said S&amp;S Projects founder and director Paul Gedoun.</p>

<p>“Our fifth project will reflect the best of what we have done so far to create a lifestyle precinct that is second to none.”</p>

<p>The latest development, which has yet to be named, is proposed to accommodate 88 luxury apartments in a design that will immerse residents in a unique wellness lifestyle that expands on the legacy of S&amp;S Project’s earlier developments at Rainbow Bay.</p>

<p>The development will feature an expansive rooftop garden and wellness centre with a resort- style pool, among a host of lifestyle amenities planned for residents.</p>

<p>“Rainbow Bay, with its beautiful, protected beach and alongside one of the world’s best surf breaks at Snapper Rocks, is the natural wellness heartland of the Gold Coast,” said Gedoun.</p>

<p>“We are taking every advantage to create a truly unique rooftop wellness experience with a natural feel for residents, offering stone features throughout and an underlying theme that emulates a botanical garden.”</p>

<p>The latest acquisition comes as S&amp;S Projects is at the completion of Esprit and construction continues on Radia, which are part of their significant portfolio undertaken by the company at Rainbow Bay since 2022.</p>

<p>The $215 million Radia, which comprises 38 apartments, is currently the flagship development by S&amp;S Projects at Rainbow Bay which is expected to be completed in 2027.</p>

<p>Jayde Pezet, of Pezet Matheson, which has managed sales and marketing for S&amp;S Projects across their Gold Coast portfolio, emphasised the developer’s commitment to continuous improvement and excellence.</p>

<p>“S&amp;S Projects continue to elevate the benchmark of luxury with each development," Pezet said.</p>

<p>“We have worked with S&amp;amp;S on their 4 other projects in Rainbow Bay and their approach reflects a team that is constantly learning, refining, and pushing the standard higher.</p>

<p>“Their hyper-local knowledge and deep expertise within the luxury property sector are what truly set them apart, allowing them to deliver projects that feel both globally sophisticated and authentically connected to their coastal environment”</p>

<p>S&amp;S Projects plans to officially launch its latest project at Rainbow Bay in the second half of this year.</p>

<p>“As we embark on our largest project yet, we have pulled out all stops to create another landmark development that truly reflects the relaxed southern Gold Coast lifestyle,” Gedoun added.</p>


S&S buys $20m Rainbow Bay site for fifth beachside apartment project

<p data-end="268" data-start="86">Japandi, an emerging design trend that combines Scandinavian functionality with Japanese rustic minimalism, remains relatively untested in Australia’s residential development market.</p>

<p data-end="545" data-start="270">As developers look to differentiate their projects and offer something distinct to buyers, Brisbane-based developer Lantona has embraced the hybrid style for its recently launched Toowong apartment project, <a href="https://www.apartments.com.au/new-apartments/koya-residences-6-josling-street-toowong-qld-4066">Koya Residences</a>, with early response to the design proving positive.</p>

<p data-end="1014" data-start="547">Lantona entrusted Red Door Architecture and interiors practice Luma Design Co with delivering the Japandi brief. The approach blends Japanese minimalism with Scandinavian functionality, emphasising warm, restrained interiors, natural materials and clean lines. Drawing on the Japanese concept of <em data-end="855" data-start="844">wabi-sabi</em> (beauty in imperfection) and the Scandinavian principle of <em data-end="922" data-start="915">hygge</em> (comfort and cosiness), it creates serene, uncluttered and sustainable living environments.</p>

<p data-end="1200" data-start="1016">These design principles are expressed throughout the Josling Street development, both in its exterior form and across the 40 one-, two- and three-bedroom residences within.</p>

<p data-end="817" data-start="541">[smartcode_project:default project_id=150787 project_image_fid=366229]</p>

<p>Koya reflects a deliberately scaled approach, with the five-storey form designed to align with the surrounding residential streetscape rather than dominate it.</p>

<p>“Koya is conceived as a building that sits comfortably within its surroundings. Every decision, from material selection to spatial planning, has been guided by long-term liveability and enduring relevance,” the developer said.</p>

<p>[smartcode_project:default project_id=150787 project_image_fid=366243]</p>

<p>Positioned within an established inner-west neighbourhood, the development sits near riverfront parklands and the Bicentennial Bikeway, while remaining within walking distance of Toowong Village and multiple public transport options connecting to the CBD, St Lucia and West End.</p>

<p>Lantona said the location was central to the project’s conception, pointing to Toowong’s balance of green space, transport access and proximity to major education institutions.</p>

<p>“<a href="https://www.apartments.com.au/developments/toowong-qld-4066">Toowong</a> combines river access, walkability, immediate CBD connection and a strong educational presence. That balance made it the obvious setting for Koya.”</p>

<p>[smartcode_project:default project_id=150787 project_image_fid=366230]</p>

<p>Communal amenity is concentrated on the rooftop, where a shared retreat will include a pool, dining areas and outdoor spaces oriented towards neighbourhood and city views. The design allows for both private use and small gatherings, extending the living environment beyond individual apartments.</p>

<p>Koya enters the market at a time when smaller-scale developments are becoming less common in established suburbs, with many recent projects in the suburb shooting for the sky.</p>

<p>In a nod of confidence,&nbsp;<a href="https://www.apartments.com.au/builders/brisbane-builders">Brisbane Builders</a>&nbsp;has already commenced construction on the building, which is slated for completion in early 2027. Keenan &amp; Byrne is marketing Koya.</p>

<p>[smartcode_project_cta:default project_id=150787]</p>


Japandi-inspired Koya Residences launch in Toowong

Investment Yields

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<p>The sustained low interest rate environment in Australia continues to drive yield compression in investment property with sales pushing well below 5% and in some cases 4%. </p>
<p>While this is frustrating for local buyers looking for safe investment opportunities and great for sellers, the question is where is it all going?</p>
<p>Holden Capital’s Construction Finance Market Update for Spring/Summer 2017 tried to figure that out.</p>
<p>The consensus of opinion amongst most economic observers seems to be that for as long as Australia continues to be identified as a safe and stable economy, quality property assets will continue to attract foreign investment. Compared to other competing stable economies, our property sector provides solid returns for investors chasing reliable income with strong WALE’s. </p>
<p>As a consequence the short to medium term outlook appears to be more of the same with local investors forced to look for bargains amongst lesser investment grade stock and yields could potentially tighten further.</p>
<p>With strong competition for quality tenants driving yield compression in large format retail centres, regionals and the key commercial sectors, the prospects for investment outside of these prime assets is likely to be characterised by local investors targeting more affordable investments and the refurbishment/ gentrification of areas previously passed over in order to reduce capital costs. Volatile stock markets, low interest rates and continuing foreign investment will also continue to drive yield compression so the question is, is there a change on the horizon?</p>
<p>Recent press has seen some commentators forecast the potential for interest rate rises in 2018 on the back of easing concerns around the strength of the underlying economy.</p>
<p>"We take the view that while there continues to be pressures on SME profits, household income growth remains weak and general consumer confidence poor, interest rates are unlikely to show signs of increasing for some time to come," says the market update.</p>
<p>As the squeeze on development funding due to APRA's restrictions began to bite, banks turned their attention to what they could continue to lend against and that was property assets which are income producing.</p>
<p>Investment lending against offices, retail, industrial sectors, hotels, etc forms part of the “Commercial” loan portfolio of a bank and while the regulator would like to see overall exposures kept below 10% of their balance sheets, there was scope for them to in some cases actually grow their exposure and then maintain it in line with their balance sheet growth.</p>
<p>“The emerging challenge for them however, has been that many overseas investors who are acquiring property are chasing a positive yield differential as they view the returns more like annuities so their intention is to hold long term, while in some cities a number of commercial buildings are being converted into residential projects,” says the update.</p>
<p>The weight of this additional capital inflow and demand from these overseas property investors (pension funds, investors and sovereign funds to name a few) aided by local demand has been a key driver of strong commercial property sales in an already low yield investment environment and, has led to a dramatic level of yield compression across these investment sectors.” </p>
<p>This in turn has raised concerns about overvalued property prices relative to historical benchmarks leading to suggestions of value bubbles and the future sustainability of the values and as a consequence, the banks debt ratios. As to how this will resolve itself is difficult to predict with the extreme being a significant reduction in values at a future date but the more likely outcome is a smaller realignment combined with a significant period of stagnation in values. </p>
<p>Either way, the banks are playing close attention to these issues and will be looking to avoid a situation where a major realignment would adversely affect their clients but more particularly their ability to remain compliant with APRA’s lending guidelines. All of which serves to demonstrate how the combination of regulatory constraints and concerns around rapidly appreciating values has resulted in a slowdown in investment lending by the major banks. </p>
<h3>Guide to Commercial Investment Loans</h3>
<p><a href="https://www.propertyobserver.com.au/images/2017/10/03/HoldenGraph.png" target="_blank">Click to enlarge</a></p>
<p> <img src="https://www.urban.com.au/images/2017/10/03/HoldenGraph.png" alt=""></p>
<p>Funding options outside of that sector are somewhat limited. In the recent past, Mortgage Funds provided the bulk of non-bank investment loans however the GFC saw a large number of these players exit the market and the remaining funds have limited capacity and or appetite. Unlike the development finance space where many small private funds have emerged to take advantage of the increased returns (and risk) on offer, there have been few new significant funding sources emerge to fill this void.</p>
<p>As always, there has also been a flight to quality by banks and other lenders seeking to improve the risk profile of their loan portfolios, so while the strong sponsors are being serviced, the gap is widening between them and the rest of the market. </p>
<p>Investment banks, hedge funds and opportunistic funds have increased their presence as funders of development property transactions, however the very nature of their return hurdles means that term debt is not a strongly targeted investment class. There are options out there, however the challenge is to understand who can fund and what the terms are (pricing, tenure, etc) as the market evolves. </p>
<p>“So to sum up, the investment lending landscape is not dissimilar to the construction finance sector with similar pressures and again, they are pressures that are not going to change overnight so it pays to have the right advice and support when you are thinking of raising debt for a new acquisition or refinancing,” it says.</p>
<p> </p>
<p> </p>
</body></html>

jonathanchancellor-7SQnKwU6yx

Low interest rates compressing yields in investment property: Holden Capital

<html><body><div class="page" title="Page 1">
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<div class="column">GUEST OBSERVER</div>
<div class="column"> </div>
<div class="column">Low and falling investment yields from most major asset classes point to a constrained medium term return outlook. For a diversified mix of assets, this has now fallen to around 6.9 percent on our projections.</div>
<div class="column">
<br>For investors the key is to: have realistic return expectations; allow that inflation is also low so real returns aren’t down as much; focus on asset allocation; and focus on assets with decent &amp; sustainable income.</div>
<div class="column"> </div>
<div class="column">Introduction</div>
<div class="column"> </div>
<div class="column">While the high inflation of the 1970s and early 1980s was bad for investment returns at the time, it left a legacy of very high investment yields which helped set the scene for high investment returns through the 1980s and 1990s. Back in the early 1980s the RBA's "cash rate" was averaging around 14%, 3 year bank term deposit rates were around 12%, 10 year bond yields were around 13.5%, commercial and residential property yields were running around 8-9% and dividend yields on shares were around 6.5% in Australia and 5% globally. Such yields meant investments were already providing very high cash income. So for assets like property or shares only modest capital growth was necessary to give good returns. As a result, back then the medium term (5-10 year) return potential from investing was solid. In fact most assets had spectacular returns in the 1980s and 1990s. Australian superannuation funds saw returns average 14.1% pa in nominal terms and 9.4% pa in real terms between 1982 and 1999 (after taxes and fees). </div>
<div class="column"> </div>
<div class="column"><a href="/images/2016/08/16/Screen%20Shot%202016-08-17%20at%208.14.36%20AM.png" target="_blank">Click to enlarge</a></div>
<div class="column"><img src="/images/2016/08/16/Screen%20Shot%202016-08-17%20at%208.14.36%20AM.png" alt=""></div>
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<p>But since the early 1980s the starting point in terms of investment yields has been moving progressively lower, resulting in slowing 10 year average nominal and real returns for superannuation funds as seen the chart above. Today the RBA cash rate is just 1.5 percent, 3 year bank term deposit rates are just 2.6-3 percent, 10 year bond yields are just 1.9 percent, gross residential property yields are around 3 percent and while dividend yields are still around 6 percent for Australian shares (with franking credits) they are around 2.5 percent for global shares. This note looks at the medium term return potential from major assets and the implications for investors. </p>
<p>Potential return drivers</p>
<p>In getting a handle on potential medium term returns from an asset class the key is its starting point valuation. For example, if current yields – say bond yields and dividend yields – are lower than “normal” then this will likely constrain returns relative to the past. Investment returns have two components; capital growth, and yield (or income). The yield is the most secure component and generally speaking, when you start your investment the higher it is the better. So our approach to assessing medium term return potential is to start with current yields for each asset class and apply simple and consistent assumptions regarding capital growth. We prefer to avoid a reliance on forecasting and to keep the analysis as simple as possible. Complicated adjustments just lead to compounding forecasting errors. </p>
<p>For equities, a simple model of current dividend yields plus trend nominal GDP growth (as a proxy for earnings and capital growth) does a good job of predicting medium term returns. This approach allows for current valuations (via the yield) but avoids getting too complicated.1 The next chart shows this approach applied to US equities, where it can be seen to broadly track big secular swings in returns. </p>
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<p> <a href="/images/2016/08/16/Screen%20Shot%202016-08-17%20at%208.17.56%20AM.png" target="_blank">Click to enlarge</a></p>
<p><span><img src="/images/2016/08/16/Screen%20Shot%202016-08-17%20at%208.17.56%20AM.png" alt=""></span></p>
</div>
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</div>
<p>For property, we use current rental yields and likely trend inflation as a proxy for rental and capital growth.</p>
<p>For unlisted infrastructure, we use current average yields and capital growth just ahead of inflation. </p>
<p>For bonds, the best predictor of future medium term returns is the current bond yield. If a 10 year bond is held to maturity its initial yield will be its return over 10 years. The close relationship between 10 year bond yields and subsequent returns from bonds is clear in the next chart. </p>
</div>
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<p><a href="/images/2016/08/16/Screen%20Shot%202016-08-17%20at%208.19.43%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
<p><span><img src="/images/2016/08/16/Screen%20Shot%202016-08-17%20at%208.19.43%20AM.png" alt=""></span></p>
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<p>Projections for medium term returns</p>
<p>Return projections using this approach are shown in the next table. The second column shows each asset’s current income yield, the third shows their 5-10 year growth potential, and the final column their total return potential. Note that:</p>
<p>We assume central banks average around or just below their inflation targets, e.g. 2.5 percent in Australia &amp; 2 percent in the US.</p>
<p>For Australia we have adopted a relatively conservative growth assumption below nominal GDP growth potential reflecting the headwind from weak commodity prices &amp; the impact of this on resource sector profits &amp; sales growth.</p>
<p>We allow for forward points in the return projections for global assets based around current market pricing – which adds 1.8 percent to the return from world equities.</p>
<p>The Australian cash rate is assumed to average 2.75 percent over the medium term. Cash is one asset where the current yield is of no value in assessing the asset’s medium term return potential because the maturity is so short. So we assume a medium term average. Normally for cash this would be around a country’s potential nominal growth rate, but we have adjusted for higher than normal bank lending rates relative to the cash rate and higher household debt to income ratios which have pulled down the neutral cash rate.</p>
<p>Combining the return projections for each asset indicates that the implied return for a diversified growth mix of assets has now fallen to 6.9 percent pa and is shown in the final row. </p>
<p><a href="/images/2016/08/16/Screen%20Shot%202016-08-17%20at%208.21.50%20AM.png" target="_blank">Click to enlarge</a></p>
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<p>Megatrends influencing the growth outlook</p>
<p>Several themes are allowed for in our projections: slower growth in household debt; the backlash against economic rationalist policies of globalisation, deregulation and small government; rising geopolitical tensions; aging and slowing populations; low commodity prices; technological innovation &amp; automation; the Asian ascendancy &amp; China’s growing middle class; rising environmental awareness; &amp; the energy revolution. Most of these are constraining nominal growth and hence investor returns. However, technological innovation is positive for profits and some of these point to inflation bottoming. (See “Megatrends ”, Oliver’s Insights, July 2016. </p>
<p>Key things to note </p>
<p>Several things are worth noting from these projections. </p>
<p>The medium term return potential using this approach continues to soften largely reflecting the rally in most assets of the last few years which has pushed investment yields lower. Projected returns using this approach for a diversified growth mix of assets has fallen from 10.3% pa at the low point of the GFC in March 2009 to 6.9% now. </p>
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<p><a href="/images/2016/08/17/Screen%20Shot%202016-08-17%20at%208.25.44%20AM.png" target="_blank"><span>Click to enlarge</span></a></p>
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<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>The starting point for returns today is far less favourable than when the last secular bull market in shares and bonds started in 1982, due to much lower yields.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Government bonds offer low return potential thanks to ultra low bond yields.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Unlisted commercial property and infrastructure continue to come out well, reflecting their relatively high yields.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Australian shares stack up well on the basis of yield, but it’s still hard to beat Asian shares for growth potential.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>The downside risks to our medium term return projections are referred to endlessly by financial commentators: namely that the world is plunged into another recession or that investment yields are pushed up to more normal levels causing large capital losses. The upside risks are (always) less obvious but could occur if global growth improves but inflation remains low which could see a continuing search for yield further pushing up capital values.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Implications for investors</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>There are several implications for investors:</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>First, have reasonable return expectations. The combinatinofof low investment yields &amp; constrained GDP growth indicate it’s not reasonable to expect sustained double digit returns. In fact, the decline in the rolling 10 year moving average of superannuation fund returns (first chart) indicates we have been in a lower return world for many years.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Second, allow that this partly reflects very low inflation. Real returns haven’t fallen as much and are still reasonable. </p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Third, using a dynamic approach to asset allocation makes sense as a way to enhance returns when the return potential from investment markets is constrained. This is likely to be enhanced by continued bouts of volatility.</p>
<em><em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"></a></em></em>
<p>Finally, focus on assets providing decent sustainable income as they provide confidence regarding future returns, eg; commercial property and infrastructure. </p>
<em><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank"><br>SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds.</em>
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