Investment
Property basics
Australians have had a long love affair with property. According to an Australian Bureau of Statistics report property assets account for almost sixty per cent of mean household assets*.
While direct residential property has been the traditional form of investment for many Australians, listed property trusts or real estate investment trusts (REITs) as they are now called have also risen in favour. REITs are pooled investments with units listed on the stock exchange, which hold a basket of properties in one or more of the property sectors.
REITs in Australia
The S&P/ASX 300 A-REIT Index provides the broadest coverage of property trusts listed on the Australian share market. It currently includes 26 stocks across the retail, diversified, office, industrial and hotel and leisure sectors**.
There has been a high degree of consolidation and concentration in the Australian market over the last ten years. For example, the Westfield Group alone accounts for almost half the index. Having said that, diversification within the underlying investment properties remains strong with thousands of properties represented across the sub-sectors of the index.
Some managed funds offer access to REITs in overseas markets. More than 90 per cent of the world's property securities investment opportunities are located overseas.
Adding international property to an Australian property securities portfolio can provide a level of diversification not available in Australia. This can improve your risk/return balance given the low correlation between Australian and overseas property markets.
Risk/return characteristics
Property is a long-term investment with higher risk than fixed interest investments but lower risk, historically, than shares.
Direct property offers steady rental income, tax breaks via negative gearing and capital appreciation. At the same time, it has a number of drawbacks. It takes time to buy and sell: building a diversified property portfolio is an expensive exercise; your property exposure is limited to one sector; locating and keeping good tenants can be difficult and there is always ongoing care and maintenance. There is also the risk of capital loss and lower rentals during times of oversupply.
REITs provide many of the benefits of direct property investment without the effort. Returns from listed property can include income in the form of rent received from the underlying properties and capital growth (or loss) from changes in the value of the share price. Listed property trusts also offer tax advantages to investors in the form of tax deferred income distributions.
Income seeking investors often compare the income yields (income as a percentage of capital value) of real estate investment trusts to ten year bonds when assessing investments. It's important to remember that while yields are usually positive share prices can fall.
Some trusts have more stable income streams than others particularly those with quality tenants and secure lease terms in a good position.
REITs have similar risks to shares. As property trusts are listed, their share price can rise and fall in value and is subject to swings in investor confidence and other factors impacting sharemarket returns.
Individual REITs are also subject to risk, with investment quality and investment exposure varying across the sector. For example, trusts involved in development projects tend to be riskier with higher gearing levels than other sectors making them sensitive to interest rate rises.
Accessing a diversified portfolio of REITs
Managed funds can invest in single or multiple listed property sectors. Some even include some exposure to direct property. The main benefits of managed funds are that you can invest in properties you would not be able to access directly yourself and you can hold a diversified portfolio of properties for a relatively small initial outlay.
* ABS: 4102.0 Australian social trends, 2006
** 23 March 2009