How Property Can Aid Portfolio Diversification

Australia’s self-managed super funds (SMSFs) are lacking in diversification, with the latest data showing that SMSF funds are predominantly invested in Australian shares and cash. How can advisers help clients gain the benefits of diversification through assets such as residential property, thereby helping smooth out market fluctuations and allowing for a more relaxing retirement?

According to ASIC, “diversification won’t guarantee gains, or protect against losses, but it should help you achieve more consistent investment returns over time”. Importantly for SMSFs, trustees are obliged to consider diversification as part of their fund’s investment strategy, which is also influenced by the fund member’s stage of life and investment goals.

Property benefits

Residential property accounted for only $25 billion of SMSF assets in the December quarter 2015, representing only a small fraction of the nearly $600 billion of assets held by such funds, despite the ability of SMSFs to access limited-recourse lending for property investments.

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As at June 2015, around 31 per cent of total SMSF assets were held in equities, 27 per cent in cash and term deposits, and just 15 per cent in direct property, raising concerns over funds’ asset allocation.

With Australian residential property outperforming shares to deliver an average annual pre-tax return of 9.8 per cent over the past 20 years, property investment is of potential benefit to any SMSF portfolio due to the reliability and consistency of “bricks and mortar”.  

According to ABS data, Sydney residential property prices rose by 13.9 per cent in the year to December 2015, with Melbourne prices up 9.6 per cent and Canberra up 6 per cent, with the total market now worth a record $5.9 trillion. But with other capital cities posting more modest rises or actually declining, there are still plenty of capital growth opportunities for longer-term investors.

DHA – a worry-free investment

Do-it-yourself property investment can be a complicated business, given the need to research the market, conduct due diligence, avoid overpaying and vet rental applicants, along with all the headaches of property maintenance.

An alternative approach may be an investment in a Defence Housing Australia (DHA) property¹. These offer SMSFs the benefit of being located in most capital cities and major regional centres, thereby having potential for capital growth, as well as providing guaranteed long-term rental income for up to 12 years².

All DHA investment properties undergo an annual rent review, and in most cases, the rental income never falls below the starting rent, even if the rental property market dips³. Importantly, DHA also takes care of the day-to-day aspects of the investment, such as rental payments, managing tenants and taking care of repairs and maintenance, so the SMSF trustee can focus on more strategic matters.

Don’t miss out on the benefits of property investment. Enquire online to find out more about how DHA can help your client achieve their investment objectives.

¹ Whether or not a DHA property is suitable for purchase through your SMSF will depend on the SMSF’s investment strategy and the circumstances of the purchase. ² Rent may be subject to abatement in limited circumstances.
³ Rental floor applies to DHA properties leased under DHA’s Lease Edition 6C, which will not cover all DHA properties. Investment is subject to DHA’s lease terms and conditions of sale. Investors retain some responsibilities and risks, including property market fluctuations. The advice contained in this article is for general information only and prospective investors should seek independent advice.

Article written by Anthony Fensom