Eyes on the property prize

Property has been a good investment for Australians, with both the listed and unlisted property sectors producing double-digit returns over the past decade.

Making the sector all the more compelling at the moment is the fact that never before has there been so much choice.

When I compare the products available a decade ago with what is available now, it’s like chalk and cheese. Yet, in many ways, investors’ understanding and their approach to property investments haven’t always kept up with the opportunities.

Despite this, it could also be argued that the more basic approach of the property investor 30 years ago reflected a better understanding of what property offered.

For instance, more weight was given to its growth aspects, whereas today there is an over-emphasis and over-reliance on income yield.

Currently, there is a diverse range of property investment products available to suit the needs of every type of investor — whatever their requirements.

Products can be selected or combined to construct a portfolio of direct properties, listed and unlisted property trusts and other property-based investments for the most sophisticated investor and the novice alike.

For example, sophisticated investors can now choose from a range of property sectors such as retail, industrial, office or healthcare, combine them or move in and out of them as they feel appropriate.

Less sophisticated investors can make their choice from a range of diversified property funds and let the portfolio manager make asset and sector weighting decisions for them.

Of course, there are still risks in property, as there are in every asset class, but there are now many more ways of managing risk and matching investment opportunities to an individual’s risk profile then there were even a decade ago. So much so that risk in property investment has never been more manageable.

However, it is concerning that many investors don’t understand the risk they assume in their choice of property investments, or the full range of opportunities they have to manage it. Many investors simply don’t understand what and where the underlying assets of their investments really are.

Over-reliance on income yield is also a worry. Income is not the only benefit of property investments, and it may not be the most important attribute for investors looking to build a diversified investment portfolio.

Property should also be used to produce growth, and this is particularly important for long-term investors.

As a growth asset, property can be particularly attractive, as it can provide a steady income yield, on par with many non-growth assets, as well as long-term growth characteristics.

As retirees are living longer, they will also need to have more of their savings allocated to growth, as well as secure income assets.

Having a property investment that can provide, say, 7 per cent income per annum and 4 per cent growth per annum, seems to me a good alternative to have in the mix, along with other non-growth assets offering similar income yields.

Today, investors can take their pick from a number of property options: they can invest directly, either individually or in a syndicate; buy shares in a listed property company; buy units in an unlisted trust; or use a combination of these.

I use the term ‘listed property companies’ rather than the standard ‘listed property trust’ on purpose, as most listed property vehicles these days are, in fact, companies rather than the true property trusts they once were.

For most small investors, the best and easiest way to build a portfolio of different property investment types is to purchase units in unlisted trusts or shares in a property investment vehicle.

While Australians’ love affair with owning their own investment property (or properties) shows no sign of abating, in reality, adequate diversification can be difficult to achieve with direct property investments. They can absorb too much capital and have an unacceptable level of risk. This is reflected in the borrowings needed, and the fact that direct property does not provide geographic or property type diversity and is illiquid.

The difference between unlisted and listed property vehicles also needs to be understood, not only to help investors manage risk, but to ensure the level of diversification being sought is what is on offer.

Listed property companies are subject to the volatility of the equity market and their share price may rise or fall for reasons that have nothing to do with property markets or the value of the underlying assets held.

There can also be duplication of investment if investors have units in an equities trust that invests in a range of industry sectors, including the property sector.

These days, listed property companies may have significant investments in other countries.

For many investors, global exposure can deliver welcome diversification and added benefit, but they should check to see exactly what the philosophy of the property company is, where the underlying assets are located, what sort of assets they are, and whether this suits their needs.

Adding another level of complexity is the fact that an increasing number of listed property companies undertake property development — including residential property sub-divisions and even home building.

Again, some investors might find this higher risk activity attractive, but for others, it may be taking on risk that is outside their comfort zone.

Similarly, unlisted property trusts may invest in only one underlying property asset class — such as industrial, retail, or healthcare property.

This may not suit particular investors, and everyone should understand where their investment is and how it fits into their total portfolio.

For the less sophisticated investor, there are unlisted property trusts that invest in a cross-section of property classes, thereby offering broad diversification.

This can often be a good starting point, allowing them to invest in other trusts, such as industrial or retail, as they gain knowledge and confidence and decide to increase their exposure to a particular sector.

So with any property investment, questions like who owns the trust management company? (is it a reputable third party or is it owned by the trust itself?), does it take on global investment or development risk?, and does it have increasing levels of debt?, should always be asked.

In addition to performance, the most widely appreciated benefits of listed and unlisted property trusts include the relatively small investment that can be made in them and their comparative liquidity.

These attractions compare very favourably with a direct property investment, where investors may have to sell the entire investment when they need only a relatively small amount of cash for another purpose.

Martin Hession is head of property at Australian UnityInvestments.