Direct property can significantly reduce volatility in SMSFs, says AUI
Recent research released by Australian Unity Investments (AUI) shows investing in direct property can significantly reduce total volatility and income volatility in an SMSF portfolio.
According to the research, a diversified growth portfolio with no exposure to direct property has an approximately 18 per cent chance of experiencing negative total returns, whereas one that contains a standard allocation of 10 per cent to direct property has an approximately 14 per cent chance of negative total returns.
The findings came from the Property Funds Association Investment Report generated by research firm Atchison Consultants.
AUI head of portfolio management Ryan Banting said the research indicated an allocation greater than 10 per cent to direct property lowered the chance of negative total returns even further.
Mr Banting said the asset class was particularly beneficial to SMSFs as it provides a “reliable, recurring source of income, with returns above the cash deposit rate”.
“As rents are often inflation linked, they also provide a natural inflation hedge, with the potential for capital growth in the longer term,” he said.
“Direct property has also traditionally demonstrated lower capital volatility than listed A-REITS (Australian Real Estate Investment Trusts) and most other listed shares."
The reason behind this, he said, is that direct property income returns are directly correlated with the property’s rental profile.
“This has resulted in less volatile income returns than A-REITs, which have historically had a higher exposure to property developments, overseas markets and other volatile investments,” he said.
The asset class was also suited to SMSF investors as they often have a longer investment horizon, he added.
“As part of portfolio construction, having unlisted retail funds with a longer investment horizon will be able to help boost yield for the portfolio as a whole,” he said.
Mr Banting said investors hoping interest in Australian property will start to wane causing a reduction in property prices “are likely to be disappointed”.
“The stability of the Australian market, high yields, and transparency, mean that Australia will continue to be an attractive destination for overseas investments, even if the interest rate gap between Australia and the rest of the world starts to close,” he said.