Investment property returns have been very good over the last few years. Many investors are sitting on large gains, but it could be slower going from here.
There is an apartment oversupply predicted to occur in the next few years. Chinese buyers are finding it increasingly difficult to get their money out of China and into Australia. The media are reporting that the Australian government wants to reduce the capital gain discount for property. These factors could combine to materially affect the property market.
However, I can understand why investors want to have exposure to property. Property is an important asset class that shouldn't be totally ignored. Investment properties have increased so much in value that the gross rental yield on properties are at all time lows. Extremely low income and low capital growth is a dangerous combination.
There are several options on the ASX that could be a great choice instead to provide good income and capital growth whilst still gaining exposure to property. Here are three of the best in my opinion:
Rural Funds Group (ASX: RFF) is a farmland real estate investment trust (REIT). It owns and leases farms such as cattle, poultry, cotton, almond, macadamia and vineyards.
The farms are spread across four different states, giving good geographical diversification. Rural Funds Group has rental agreements with all tenants that are linked to inflation or inflation-like rental increases. This allows management to confidently predict that the dividend will grow by 4% in FY18.
It's currently trading with a dividend yield of 5.57% for FY17.
Generation Healthcare REIT (ASX: GHC) is a REIT that owns and leases healthcare buildings. Its portfolio includes hospitals, aged care buildings and pathology centres.
Healthcare is a defensive sector that is getting increased demand thanks to Australia's ageing population, allowing Generation Healthcare to steadily hike the rental charge.
Generation Healthcare is trading with a dividend yield of 4.74%.
National Storage REIT (ASX: NSR) is a REIT which is the largest self-storage provider in Australia. As we accumulate more stuff in our lives we need more places to put it — IKEA's smart storage solutions can only help so much.
I think National Storage is a good way to profit from people needing more real estate to store their belongings, whilst the land that the storage centre sits on hopefully increases in value over time too.
National Storage currently has a dividend yield of 6.21%.
Foolish takeaway
All three of the above stocks will make better investments than an investment property over the next few years in my opinion.
Rural Funds Group is by far my favourite, whilst the other two could be good choices as well at the current prices. However, if you don't want to invest in property at all then perhaps our number one dividend pick for 2017 would a good home for your capital instead.
