Property and diversified portfolio

Diversification is the standard tactic employed to reduce the total risk of your investment portfolio. By spreading your investment risk across different asset classes, geographic markets, time periods, fund managers and shares, losses should be isolated to independent asset classes and ideally, can be offset by gains on other assets.

Why include property?

As one of the major asset classes, property is indispensable to a well-diversified portfolio. From the investor viewpoint, property can be split broadly into residential, commercial, industrial and retail sectors. It can also be directly owned, like most residential property, or indirectly owned through a managed fund, a syndicate structure or through a real estate investment trust (A-REIT).

All classes of property provide valuable diversification as property returns tend to move independently of other major asset classes such as shares and cash. Additionally, both residential and direct property have a low or negative correlation with other asset classes providing excellent portfolio diversification benefits.

What type of returns does property offer?

Another consideration for your portfolio is the balance between ’growth‘ assets and ’defensive‘, or ’income‘ assets. Growth assets tend to carry greater risk, yet have the potential to deliver higher returns over longer investment time frames.

In contrast, defensive assets tend to carry lower levels of risk and therefore, are more likely to generate lower levels of return over the long term.

Whilst generally classified as a growth asset, property can also provide reliable income through rental returns, along with capital growth through asset price appreciation over time. Property values fluctuate more than fixed interest and cash but not as much as shares. It is for this reason that property is regarded as a growth asset, but one at the lower end of the risk spectrum with some defensive or income characteristics.

Property in different stages of life

Investors seeking to build wealth tend to have an appetite for growth assets at the higher end of the risk spectrum. Younger investors particularly have a higher tolerance for short-term fluctuations in value as they are more likely to be able to sit out the troughs inevitable in long-term investment cycles.

While investors approaching retirement tend to have an increasing allocation to lower risk assets, most retirees require income from their portfolio. This makes property an increasingly attractive option in a retirement portfolio because it generally has lower risk than shares but pays a much higher income than cash.

Direct or managed property investment?

The most common direct investment made in property in Australia is in residential. Residential property is tangible, can offer tax advantages and is an asset that many investors have experience with and, therefore, understand. However, investment portfolios that hold direct residential property can be poorly diversified due to a large percentage of capital concentrated in the one illiquid asset.

As an alternative to direct property, direct property trusts, funds and A-REITs can provide many levels of diversification and flexibility to a portfolio. Whilst providing exposure to capital growth from property price appreciation, as a unitized investment they are easier to trade.

Greater diversification within the one asset class is also possible, as a reduced initial investment can provide exposure to multiple properties or sub-sectors such as retail, commercial, and industrial.

Property is an essential part of any well-diversified portfolio and, in addition a balance of potential capital growth and income returns, offers diversification across many levels.

If you are interested in property investment, speak to Wynyard Park Private Wealth for more information.