An allocation of bricks and mortar may add value

By Simon Gross, Portfolio Manager - Property 

The ‘Great Australian Dream’ is a belief that most of us grew up with, where home ownership was perceived as the ultimate goal and direct property investment, outside the family home, was a product of success and security. Perhaps it is due to this demand that direct property investment has become a well-established, relatively transparent and broadly understood asset class that has provided a consistent income return and capital growth to many Australians. It has also exhibited lower volatility than the listed property sector, not to mention the broader share market as well. As such it makes sense to consider direct property investment within in a diversified portfolio. 

Our definition of direct property investment excludes residential property. For the purposes of this article we are concerned with large investment grade properties which private investors can’t normally access due to the high value of the individual assets and the complexity of their ongoing management.

Consistent returns and diversification

A major appeal associated with investment grade commercial, industrial and retail direct property in Australia is its record of generating reliable and consistent income returns, generally ranging from six and a half to eight and a half per cent per annum over extended time periods.

The existence of a direct property allocation within an investment portfolio assists investment performance due to its ability to add an element of diversification. This assists in smoothing investment returns through periods of investment volatility and economic uncertainty and can add considerable value when the demand for investment grade direct property is high.

Over both short and long term periods direct property has a low correlation to most other asset classes which assists in the  reduction of portfolio volatility. The Global Financial Crisis particularly highlighted the contrasting total returns between the direct property and listed property investment sectors and illustrated the substantial merits of considering the inclusion of both products within balanced portfolios.

Preserves investor value in downturn and assists out-performance

In comparison to other more volatile asset classes, direct property investment acts to preserve portfolio value in periods of general economic and investment performance downturn. Although loss in market value does occur during certain stages of the economic cycle, the sectors characteristic of lagging the general economy effectively smooths investor returns and can assist preserve the value of investor funds.

Investment portfolios which exclusively hold property securities or real estate investment trusts (REIT’s) can be disadvantaged due to their lack of direct property allocation. The exposure to direct property held by investors during the Global Financial Crisis (GFC) was instrumental in improving those funds relative performance against funds which exclusively held investments in the equity markets.

Capabilities and track record

In Australia, managers of investment grade direct property portfolios have proven that they have the capability of developing, acquiring and managing quality properties while maintaining income returns from diverse national property portfolios.

The proven track record of the direct property sector over an extended period of time is a clear indication that an appropriate allocation should be considered by investors for inclusion within a diversified investment portfolio. 

Opportunity

With property values falling during and after the GFC it is generally accepted that the Australian direct property valuation cycle is at or near a low point and investment yields have stabilised thus generating a timely opportunity for investors to review the merits and potential benefits associated with including or expanding their allocation to the direct property sector.

The IOOF investment team runs an internally managed direct property portfolio that was first established over twelve years ago. Since 2010, the portfolio has been used as an investment vehicle for the MultiMix range of diversified funds and contributed markedly to their performance. The portfolio is currently enjoying a 99 per cent occupancy rate with no major lease expiring in 2014 and a current market value of $229 million as at 31 December 2013. Over several decades investment grade direct property portfolios have met objectives by delivering consistent income returns with low volatility and moving forward we expect the asset class to continue to provide relatively reliable and consistent returns.

For more information on our range of MultiMix funds, please contact our adviser services team on 1800 659 634 or go to www.ioof.com.au/multimix

Simon Gross - Portfolio Manager, Property

Ass. Dip — Valuation

Dan-Farmer

Simon Gross, Portfolio Manager – Property, is responsible for the overall management and performance of our multi-manager property portfolios and our internally managed direct property portfolio. Our multi-manager investment approach adds value on several fronts; those being our active management of underlying investment managers, our dynamic asset allocation and our robust risk management approach. For more information on our MultiMix range of funds – go to www.ioof.com.au/multimix