Invest
Direct property: a low volatility pathway to asset growth
As the heat continues to recede from Australia’s east coast residential property markets, advisers and investors are turning their attention to other real estate options and opportunities.
Direct property: a low volatility pathway to asset growth
As the heat continues to recede from Australia’s east coast residential property markets, advisers and investors are turning their attention to other real estate options and opportunities.
Specifically, the focus is increasingly on the investment-grade commercial property sector, where income yields of around 6 per cent p.a. are on offer and total returns (including capital growth) in the order of 9-10 per cent p.a. are expected.
The large superannuation funds and life assurance companies typically hold 8 per cent to 15 per cent of their portfolio in commercial property, and more and more individual investors and SMSF members/trustees are following suit.
At the same time many investors, and the professional investment community generally, have experienced somewhat of a shock: a significant sharemarket correction led by the US stock market, which other major bourses followed.
Suddenly a market characteristic that seemed to be on everyone’s back burner because it has been so benign for so long, namely volatility, is front and centre.
While equities markets seemed to have settled somewhat, the strength of the US economy and the potential of rising interest rates globally means investors and savers are on edge.
One question facing those building their nest egg who are looking to emulate the big super funds by allocating monies to investment-grade commercial property have to consider is: what type of property investment to make?
The two major options are direct property funds, also known as unlisted property funds and real estate invest trusts (REITs).
My firm, Charter Hall, is one of the largest and most successful participants in both markets, with almost $22 billion under management across all forms of commercial property including both the aforementioned types of funds plus wholesale funds, private syndicates and wholesale partnerships.
One of the major differences between the two forms of trusts or funds is liquidity. REITs are listed on the ASX and consequently are highly liquid. Their values tend to fluctuate in line with the movements in equities generally. Thus REITs may trade at above or below net asset value depending on prevailing equity market sentiment. Importantly, they are also subject to similar volatility to the ASX and most pundits are now predicting increasing volatility going forward.
Direct property funds on the other hand are relatively illiquid for the period of the fund, generally five years. They are a ‘buy and hold’ asset and should be funded out of one’s non-cash bucket. Charter Hall direct funds, and many others, will usually have regular limited liquidity events to give investors in need of cash the opportunity realise a part of their holding, but the actual amount may be rationed depending on the number of people wishing to cash out.
One of the attractions of direct funds is that they are valued daily and the values reflect the underlying assets. Also, they have very low volatility, especially compared to REITs because they are not subject to the normal fluctuations of the equities markets. For many investors this is a particularly attractive characteristic and it is one that is likely to attract much greater interest as investors contemplate the immediate market outlook and the return of volatility.
I am constantly asked what form of property fund do I recommend? Direct, with its low volatility and generally longer-term holding and the prospect of around 9-10 per cent p.a. total return; or REITs, which can be liquidated by a call to the broker but whose value may be higher or lower than actual net assets depending on the stock market mood at the time.
One of the soundest rules of investing is diversification. My first advice is to consult your adviser, planner or accountant. My second observation is it makes sense to have a mix of both based on your individual circumstances and needs.
Steven Bennett is head of direct property at Charter Hall.
Investment insights
Why ethical investing is at a tipping point
Best-selling author Malcolm Gladwell said it best: “Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – ...Read more
Investment insights
Ares withdraws from AMP bid as wealth manager’s financial results spell trouble
The bad news keeps rolling in for AMP, with the wealth manager reporting a significant drop in profit as its US bidder, Ares Management Corp, announces that it is backing out. ...Read more
Investment insights
‘RBA not responsible for asset prices’, governor says
RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of l...Read more
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
Investment insights
Yes, working from home is risky. Here’s how to counter that
Before COVID, 26 million Americans worked from home part-time or full-time, and now that number has tripled. ...Read more
Investment insights
ESG is becoming popular but ‘greenwashing’ is a problem
Sustainable investing is back on the radar as a result of the COVID-19 pandemic, but experts warn that better standards around ESG products are needed to mitigate “greenwashing”. ...Read more
Investment insights
Federal Court case lodged to stop Qantas from outsourcing 2,000 jobs
Qantas is being dragged to court over its decision to outsource 2,000 jobs across 10 airports in Australia as part of a company-wide restructure. ...Read more
Investment insights
Where should you invest when interest rates are so low?
With the cash rate close to zero, this will have big implications for how you should invest your money to generate the best return. So, what are the options and which asset classes will best enable yo...Read more
Investment insights
Why ethical investing is at a tipping point
Best-selling author Malcolm Gladwell said it best: “Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – ...Read more
Investment insights
Ares withdraws from AMP bid as wealth manager’s financial results spell trouble
The bad news keeps rolling in for AMP, with the wealth manager reporting a significant drop in profit as its US bidder, Ares Management Corp, announces that it is backing out. ...Read more
Investment insights
‘RBA not responsible for asset prices’, governor says
RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of l...Read more
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
Investment insights
Yes, working from home is risky. Here’s how to counter that
Before COVID, 26 million Americans worked from home part-time or full-time, and now that number has tripled. ...Read more
Investment insights
ESG is becoming popular but ‘greenwashing’ is a problem
Sustainable investing is back on the radar as a result of the COVID-19 pandemic, but experts warn that better standards around ESG products are needed to mitigate “greenwashing”. ...Read more
Investment insights
Federal Court case lodged to stop Qantas from outsourcing 2,000 jobs
Qantas is being dragged to court over its decision to outsource 2,000 jobs across 10 airports in Australia as part of a company-wide restructure. ...Read more
Investment insights
Where should you invest when interest rates are so low?
With the cash rate close to zero, this will have big implications for how you should invest your money to generate the best return. So, what are the options and which asset classes will best enable yo...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
