Property yields will remain high in future as the funds available for investment in real estate continue to grow, despite an overall decline in net contributions to superannuation as the population ages, a report has predicted.
The report, released by Westpac Property, assumed income streams from property would be reinvested as retirees moved to access their benefits as annuities rather than lump sums. This meant property assets would not have to be sold off to fund the pay outs.
Westpac’s director of property markets Frank Allen said property would continue to be attractive to superannuation funds as initial yields were high compared to other asset classes.
“The steady income that is coming through from a commercial property investment is really what is the attractive thing,” he said.
Allen said that while 75 per cent of benefits were currently taken as lump sums, this would drop as fund values grew to a level which would provide a meaningful annuity.
The report revealed this shift has already begun, with 81 per cent of benefits being taken as a lump sum in 1999 and 79 per cent in 2003. A recent Rainmaker Information report suggested the number would fall over the next 10 years to 46 per cent.
The Westpac report forecast changes in retiree and workforce numbers in three scenarios; one modelling a healthy economy and the other two testing outcomes if unemployment increased to recession levels.
Allen said the model demonstrated that through the annual re-investment of property income, the increasing levels of funds were “almost recession proof” even though net contributions were predicted to be negative in 2011, when the number entering retirement will exceed those entering the workforce.
The report found re-investing income from property, assuming a stable economy, would provide an additional $3.4 billion for investment this year, rising to $5.5 billion in 2014 and $11 billion in 2024. Even in the recession scenario, new investment funds available would be $3.3 billion in 2011, the report found.
