Direct property allocations too low - report

By Zoe Fielding

FINANCIAL advisers are being encouraged to reassess their typically low allocations to direct property, following the release of research highlighting the importance of unlisted property and the risks of holding equity-dominated portfolios.

Ken Atchison, managing director of AtchisonConsultants, which conducted the research for the Australian Direct Property Investment Association (ADPIA), said to date there has been insufficient focus on what investors require from their portfolios.

“[Investors are] concerned about downside risk and high volatility. Once you focus on those, the attributes of property will come through and that’s just not focused on enough,” he said.

According to the research, increasing allocations to direct property from zero to 30 per cent in a standard growth portfolio could reduce the chance of delivering negative returns from one year in 10 to one year in 44.

The research also found direct property had the lowest downside risk — other than cash — with average potential losses on $100,000 invested for 20 years at only $3,900, compared with a $37,000 risk for the same amount invested in Australian shares.

Retail property was found to have delivered 20-year returns of 12.8 per cent, almost equalling returns from shares (13.4 per cent) over the same period, but experiencing only 2.7 per cent volatility compared with 16.9 per cent volatility for equities.

ADPIA president Richard Cutler said the research would help advisers and investors understand the importance of including direct property in investment portfolios.

“The continuing low allocation to direct property in portfolios, which has always seemed illogical, now seems much more serious… Given the strength of these findings, investors, financial advisers and asset consultants who failed to increase portfolio exposures to direct property may well find themselves answerable to investors for the consequences and with member choice coming on stream, one of the consequences could be a serious outflow of funds,” he said.

Atchison said the research would also help advisers who were nervous about increasing their allocation to direct property.

“There’s a tendency to go with what is standard and the standard allocation is around about the 10 or maybe 15 per cent mark. So to go to 25 or 30 per cent you’re actually standing out from the pack… I’m trying to provide the analysis that allows people to stand out from the pack for a good reason, not just for the hell of it, but for sound reasons,” he said.