Direct property helps reduce volatility in portfolios

From

Investing in direct property is one of the best ways to manage total volatility and income volatility in a portfolio, says Ryan Banting, head of portfolio management at Australian Unity Investments.

“Recent research* shows that a diversified growth portfolio with no exposure to direct property has an approximately 18 percent chance of experiencing negative total returns, whereas one that contains a standard allocation of 10 percent to direct property has an approximately 14 percent chance of negative total returns.

“And the more direct property held within a portfolio, the lower the chance of negative total returns due to the stabilising effect of rental income.

“It is noteworthy that the same does not hold true of listed property, or Australian Real Estate Investment Trusts (AREITs), due to the high correlation of an AREITs share price with the broader share market.”

Mr Banting said that as well as reducing total volatility, direct property can contribute to higher income returns within a portfolio. (See Chart A.)

“Direct property has generated consistently high income returns with lower absolute volatility than even cash and fixed interest, in contrast to AREITs, over the last 25 years.

“The reason for this is that direct property income returns are directly correlated with the property’s rental profile.  This has resulted in less volatile income returns than AREITs, which have historically had a higher exposure to property developments, overseas markets and other volatile investments.

“As well as providing stable income returns of around 7 to 8 percent, direct property also provides the opportunity for capital growth in the long term as rents are often inflation linked, resulting in increases to capital value.

“As part of portfolio construction, having unlisted retail funds with a longer investment horizon will be able to help boost yield for the portfolio as a whole,” Mr Banting said.

He added that investors hoping interest from overseas investors in Australian property will start to wane, causing prices to come down, are likely to be disappointed.

“The stability of the Australian market, high yields, and transparency, mean that Australia will continue to be an attractive destination for overseas investments, even if the interest rate gap between Australia and the rest of the world starts to close.

“Australian investors who are considering investing in property shouldn’t hold off in the expectation that the flow of capital internationally will dry up,” he said.

Chart A

dec1-580

 Source: Atchison Consulting, S&P/ASX, MSCI, REIA, CBA, UBS, RBA, PCA/IPD

* Property Funds Association Investment Report, Property Performance Research, by Atchinson Consultants – February 2014

You must be logged in to post or view comments.