APN Property : Bubble, bubble, housing trouble?

A combination of planning restrictions, high land costs and the absence of infrastructure projects to connect new suburbs with city centres, has meant a bias among developers toward apartments at the expense of family homes. Supply is expected to reach record levels of around 220,000 dwelling completions this year. Thus far, this has been largely absorbed by a historically under-supplied market.

3. What would be the direct impact of apartment oversupply on AREIT investors?

For APN AREIT Fund investors at least, very little. Residential property accounts for less than 8% of the fund's portfolio. Within that, only two stocks - Mirvac and Stockland - have exposure to inner city apartments. Even in the very worst case - a scenario we're not expecting - the impact on the fund would be negligible.

The portfolio allocations tell the story. As of 31 May 2017, 60% of the fund's assets were allocated to high quality retail developments, 20% to office and 12% to industrial. In each case, we believe more reliable, attractive returns can be found than in residential, which is to say those allocations offer a clue to the answer to the next question.

4. Is residential still a good bet?

With many Australians having most of their wealth tied up in residential property, even if the bubble concerns are overblown there's a good case for diversification. And if we are in a bubble, that case is even stronger.

It's also worth noting that the sector looks expensive on all metrics. House prices are historically high and the yields on offer correspondingly low. The high costs of maintaining a residential property and a likely oversupply of apartments in key markets should prompt a rethink by investors; an examination of the extent of their over-exposure to residential property and possible lower risk alternatives.

Commercial property exposure, for example, offers all the things residential property does not; from sustainable, regular and growing income to low maintenance costs.

Not only is the risk/reward trade-off superior (due to the lower reliance on capital growth versus security of the rental income stream), but the liquidity and diversification, in addition to the lower ongoing costs, can make an AREIT investment attractive. In addition to these benefits, APN's AREIT Fund, for example, currently delivers a yield of 6.11% as at 31 May 2017.

Our suggestion therefore is not to try and pick whether Australia is in the midst of a property bubble or not and think about it in terms of probabilities. If there was, say, a 30% chance that house prices were going to fall 20% and more than half your portfolio was in residential property, would you want to mitigate that risk and if so, how?

That's the question residential property investors should be asking themselves right now, not whether we're in a bubble or not. We'll only find that out if and when it pops. Best to be wise before the event rather than after, even if it doesn't actually happen.