This article is from the Australian Property Journal archive
Direct property has delivered the highest return and is one of the most stable investments in Australia, according to a report commissioned by the Australian Direct Property Investment Association.
The report, undertaken by Atchison Consultants, studied the performance of 11 asset classes including direct property (also known as commercial property), Australian shares, overseas shares, residential property, listed property, Australian fixed interest, cash and managed funds. The study also looked at direct property’s sub-sectors, namely, retail, office and industrial.
According to the Atchison study, direct property produced very strong total returns when compared to the other assets classes over the 10 and 20 year periods to June 2006.
The study showed total returns for direct property was 9.5% per annum over the 20 years and over 10 years, return was 10.5% per annum.
Direct property also delivered the highest risk adjusted return of any asset class. Over 10 years, direct property provided the highest levels of income returns of any asset class, delivering 7.2% and over 20 years, it provided income returns of 7.1%.
The study showed direct property was the only asset class (other than cash) that investors would not have lost money in any given year. Over 10 years, direct property provided the lowest volatility of income return and over 20 years, the amount of loss an investor was exposed to was lowest for direct property compared to all other asset classes other than cash.
ADPIA’s president Owen Lennie said this means that an investment in direct property is of particular advantage for late stage superannuation savers and retirees looking for capital stability.
“Combining tax advantages, high income and low volatility, direct property appeals to wealth accumulators, many of whom may wish to gear their direct property investment to maximise after tax returns,” he added.
According to the report, direct property also delivered the lowest downside risk (“value at risk”) when measured against any other asset class apart from cash on a one year perspective.
Atchison Consultants’ managing director Ken Atchison said that direct property’s low volatility is an extremely valuable characteristic.
“It is low volatility that reduces the chance of making a timing error when entering or exiting the market, and this can make a significant difference to long term returns.
“When portfolio risk is reduced, investors can better focus on longer term objectives as they are less likely to respond with inappropriate reflex investment decisions.” he added.
Lennie said the report clearly demonstrates that having direct property in a portfolio significantly reduces investment loss while cutting portfolio risk.
“Current allocations to property are “illogically” low. The report’s findings clearly demonstrate that investors with property allocations of 5 to 10% should be increasing these allocations to at least 20% in balanced, growth and high growth portfolios.
“We call on investors, asset consultants and researchers to carefully review this new research. The findings are clear – investors should have at least 20% direct property in their portfolios. Smart investors and their advisers who intuitively understand direct property’s benefits now have solid research to back their instincts.” Lennie concluded.
ADPIA Investment Report
Asset Class Returns measured after fees and costs with nil tax
(10 year analysis to 30 June 2006)
Direct property components clearly have been in the below median volatility segment while providing strong returns.
|
Asset Class
|
Return
|
Volatility
|
|
Australian Shares
|
12.7%
|
11.6%
|
|
Overseas Shares
|
7.3%
|
14.4%
|
|
Residential Property
|
11.4%
|
5.9%
|
|
Listed Property
|
14.6%
|
9.9%
|
|
Fixed Interest
|
7.2%
|
3.7%
|
|
Cash
|
5.5%
|
1.6%
|
|
Managed Funds
|
9.7%
|
6.4%
|
|
PCA Composite
|
10.5%
|
1.6%
|
|
PCA Retail
|
11.7%
|
2.4%
|
|
PCA Office
|
8.7%
|
1.5%
|
|
PCA Industrial
|
12.8%
|
1.4%
|
|
Inflation
|
2.6%
|
|
Asset Class Income Returns measured after fees and costs with nil tax
(10 year analysis to 30 June 2006)
Absolute Returns – Income Returns and Volatility of Returns (nil tax)
Direct property and each component have provided very strong income returns and very low volatility. The strong income underpins property as an Absolute Return investment.
|
|
Income Return
|
Income Volatility
|
|
Australian Shares
|
3.6%
|
1.2%
|
|
Overseas Shares
|
1.4%
|
0.2%
|
|
Residential Property
|
3.3%
|
2.9%
|
|
Listed Property
|
7.1%
|
2.2%
|
|
Fixed Interest
|
5.8%
|
3.5%
|
|
Cash
|
5.4%
|
0.2%
|
|
Managed Funds
|
4.4%
|
1.0%
|
|
PCA Composite
|
7.2%
|
0.1%
|
|
PCA Retail
|
7.3%
|
0.2%
|
|
PCA Office
|
6.9%
|
0.1%
|
|
PCA Industrial
|
9.0%
|
0.4%
|
|
Inflation
|
2.6%
|
|
Direct property within a balanced (60% growth asset) portfolio
(10 year analysis to 30 June 2006)
Property within a Diversified Portfolio
Reduced Probability of Negative Return
When included in a balanced (60% growth) portfolio, direct property would have greatly reduced the prospect of a negative annual return.
|
Proportion Direct Property
|
Probability Negative Annual Return
|
|
0%
|
7.54%
|
|
5%
|
6.01%
|
|
10%
|
4.53%
|
|
15%
|
3.16%
|
|
20%
|
1.97%
|
|
25%
|
1.04%
|
|
30%
|
0.43%
|
|
35%
|
0.12%
|
|
40%
|
0.02%
|
|
45%
|
0.00%
|
|
50%
|
0.00%
|
Sharpe Ratio measured after fees and costs with nil tax.
(10 year analysis to 30 June 2006)
Reward and Risk – Sharpe Ratio
The ratio of additional return above the risk free rate, being measured as the cash return, to the additional volatility of returns of each asset class. An outcome above 0.5 is considered to be good. All costs and fees have been attributed.
It is clear that direct property and the components provide the strongest gains on a volatility adjusted basis.
|
Asset Class
|
Sharpe Ratio
|
|
Australian Shares
|
0.62
|
|
Overseas Shares
|
0.13
|
|
Residential Property
|
1.00
|
|
Listed Property
|
0.92
|
|
Fixed Interest
|
0.47
|
|
Cash
|
0.00
|
|
Managed Funds
|
0.66
|
|
PCA Composite
|
3.13
|
|
PCA Retail
|
2.63
|
|
PCA Office
|
2.16
|
|
PCA Industrial
|
5.07
|
