Bruce Brammall, The West Australian, 2 September, 2019
It’s a weird investment world we’re experiencing at the moment. Little seems to make sense.
Cash is no longer no risk. It’s a huge risk. Your money is actually guaranteed to go backwards, after accounting for inflation and tax.
Fixed interest was damn nearly the best performing asset of recent times – now in bubble territory and likely to fall over soon. And shares, after a stellar run since Christmas, have seen more than a month of volatility of Gordon Ramsay-esque proportions.
Which brings us to property. By any accepted definition of investment risk, property is less volatile than shares, but more so than cash and fixed interest.
If you’ve been trying to read the tea-leaves about property investment in recent times … it’s okay to be confused.
Property isn’t a simple game. It’s got layers of complexity. I’m going to try to simplify it.
If you want to keep investing simple, you can. There are high-risk investments and low-risk investments.
Within low- and high-risk investment asset classes, there’s a complete spectrum of risk from low to high.
The opportunities to invest in property are everywhere, with risk that is as diverse as the intelligence of the Oval Office. Is there any?
Let’s run through some of the current opportunities in the various classes of investment in property.
Real estate investment trusts are listed property investment vehicles. For any of you with regular superannuation accounts, if you have any money invested in property (most of you), this is largely what you’re invested in.
REITs were an Aussie invention, the grandaddy of which was Westfield shopping centres. Westfield has had more incarnations than Madonna has had makeovers in the last two decades.
But the general theory of REITs is that they are property trusts that hold shopping centres, office towers or industrial complexes.
They tend to offer reasonable income streams, but can actually be quite volatile, as they are ASX-listed. When the ASX200 lost about 55 per cent during the GFC, REITs crumbled 75 per cent, largely because of the enormous rise they had enjoyed in the few years’ previous.
Unlisted property trusts
Too many to mention anyone specific.
These property vehicles tend to put smaller groups of investors together, to look at distinct investments. They argue that they can provide better, more stable income returns and tend to buy better quality, less risky, commercial investment property.
Currently, they are heavily pushing the line that they are able to provide highly reliable, safe, rental income streams. And they’re pulling in big dollars from investors.
But … they lack liquidity.
These were the vehicles that during the Global Financial Crisis were frozen, after Lehmann Brothers collapsed, leaving investors unable to get their money back for up to 10 years. This style of investment, which had provided great returns for years, turned out to have major, major, liquidity issues.
Residential investment property
This is a personal investment, which usually requires you to invest $500,000 or more, and is largely funded by debt you hold in your own name.
It completely lacks diversification, as you can only buy a single property at a point in time. Do this one badly and you can destroy your personal finances.
There is no pooling of risk with others. You are taking it on all by yourself. Get it right and you’ll do well. Get it wrong and you’re on death row.
But I love it.
Direct residential property can potentially provide wonderful income and growth returns if you avoid the great wealth vacuums of buying from developers, buying property without a significant land content, but stick to purchasing in state capitals. This is potentially a great long-term wealth creation vehicle.
If you get it right, it can be an incredible cornerstone of building financial wealth.
Direct commercial investment property
Personally holding a shop, or office, or restaurant or medical practice building, for example.
The income yields on these investments tend to be great … while you’ve got a tenant.
When you don’t have a tenant, you can be without one for a very long time. Expect six months, on average. That’s a long time to go without rent, particularly if you still have a mortgage to pay on it.
You’re going to hear a lot of noise about property as a vehicle for income enhancment. Be wary. Property is a “growth” asset class, which means periods of negative growth too.