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Page last updated Monday, 16 November 2009
Property Bulletin - Issue 34: November 2009
Independent research also confirms conservative gearing strategies enhance returns
The Australian Direct Property Investment Association (ADPIA) released the full Investment Performance Report from respected research and consulting Group, Atchison Consultants. The Report measured returns over the past ten and 20 years, to June 2009.
President of ADPIA, Linden Toll, said that while the volatility of the past two years had impacted returns, the traditional property benefits of strong total returns and low downside risk had remained evident.
“Direct property provided returns of 10.1 per cent over ten years and 6.9 per cent over the past 20 years. It also provided income returns of 6.7 per cent per annum over ten and 6.9 per cent over 20 years. Importantly, once again it did this at the lowest level of volatility and lowest downside risk of any investment.”
Mr Toll said that while over-gearing had been responsible for much of the pain in property markets in the past two years, the research demonstrated that a conservative level of gearing was still a very effective way of enhancing returns.
“Gearing in property has been one of the most contentious issues for investors over the period of the GFC,” he said. “High levels of gearing and an inability to refinance, was certainly the most debated issue in our industry over the past 12 months.”
“However, our research has shown that conservative gearing does work. Gearing over the longer term is rewarded, but requires considerable management skill and restraint. Problems with gearing have arisen as managers continued borrowing as property values rose. No different to a residential mortgage that is continually drawn down as the market heats up, managers who instead conserved the upside and maintained a reasonable level of gearing have been rewarded – as have their investors.”
Returns over 10 years to June 2009 from geared property and components have been strong in absolute terms and relative to inflation.
Mr Toll said the Report also showed that Direct Property reduces negative annual returns in diversified portfolios. “Evidence is clear that the inclusion of direct property in diversified investment portfolios can reduce the chance of negative annual returns in the portfolio. When negative returns are avoided it is less likely the investors will take inappropriate defensive investment decisions as a response and will focus on longer tem objectives.”
“Additionally, secure income streams from sound tenants with leases structured for growth in rental income, provides the stability for which property investors have been rewarded.”
Mr Toll said the study also shows that investors should be increasing property allocations from five to ten percent to 20 per cent in balanced, growth and high growth portfolios.
Property investment returns were reduced by almost 20 per cent over five years for investors in listed rather than unlisted property investments.
The Report showed that investors in direct property achieved a 9.8 per cent return over the past five years to June 09, against an -8.6 per cent for AREITs (or LPTs). The direct property returns also carried a much lower level of volatility – five per cent compared with 21.8 per cent.
The returns were also more favourable over ten years with a return of 10.0 per cent and volatility of 3.6 per cent for direct property. AREITs delivered just 2.1 per cent with 16.7 per cent volatility.
Atchison Consultants Managing Director, Ken Atchison, said it was clear that liquidity in property had a significant detrimental impact on investor returns. “Around the world baby-boomer investors were seeking high levels of income,” he said. “What this led to were complex listed property structures that were artificially feeding income through complex development and hedging structures rather than pure rental returns.”
“For a while LPTs produced strong returns, but what we now know is that these structures were unsustainable.” The Report showed that LPT returns outperformed direct property from June 89 to June 07. However, since the market downturn commenced in July 07, the returns from direct were stronger that those from LPTs.
Returns over 10 years to June 2009 from industrial and retail property especially and office property have been strong in absolute terms and relative to inflation.
Direct property has provided very low volatility of returns. Low volatility of returns reduces the prospect for inappropriate reactive responses reflecting an aversion for losses. Loss aversion reflects the greater weight given by investors to fear of loss rather than hope of gain. Timing of purchases and sales in direct property will be less demanding than in listed growth assets. High volatility means that total returns can be greatly diminished by poor timing of purchases and sales by investors introducing loss aversion and prospectively poor decisions.
Relative rewards for volatility arising from investments as measured by the Sharpe ratio indicate that retail, office and industrial property have all been attractive relative to all other asset classes. As volatility of returns is a key factor in poor investment decisions this enhanced risk adjusted return outcome represents a benefit from property investment.
Over 10 years to June 2009 direct property has provided the highest level of income returns and among lowest volatility of income returns. High and sustainable income has considerable attraction for investors who seek consistent absolute returns. The prospect of sustainable of pension payments received by investors in retirement is significantly enhanced.\
Property represents relatively low downside risk exposure when measured against other asset classes on a one year prospective. Enhanced preservation of capital arises from property providing stability of income. Poor decision making by investors responding with fear when short term negative movement in markets has occurred, is less likely when investing in property.
Over the past 10 years, stability of property returns is highlighted when the measure of maximum drawdown is used. This reflects the measure from the peak of markets to the trough on a quarterly basis and shows that property loss has been relatively low.
Based on three liquidity measures, listed property has a higher level of liquidity than unlisted property. The liquidity trade-off indicates that expected returns from unlisted property should be higher than listed property, which it has been over the long term – but not necessarily over the shorter terms.
Analysis confirms that as the risk of in the investment model increases from gearing and stapled sectors the volatility of returns becomes significantly higher.
This media release was first distributed by ADPIA on 13 October 2009.
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