The Australian Financial Review
www.afr.com.au

Direct approach pays off

Investors who took the trouble to invest in direct property have been vindicated as their returns held up better than listed property during financial turmoil.

While all property investors have suffered during the downturn, direct property investments suffered less than listed trust holdings, an Atchison Consultants report commissioned by the Australian Direct Property Investment Association (ADPIA) has found.

Property trust returns out performed direct property from June 1989 to June 2007 but the situation was reversed from July 2007 as the market collapsed.

ADPIA president Linden Toll said the findings supported the case for maintaining a conservative level of gearing as a way of enhancing returns.

“Gearing in property as 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 hotly 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.”

In the 10 years to June 2009, direct property boasted a return of 10.1 per cent and a 6.9 per cent return in the past 20 years.

By contrast, Australian real estate investment trusts have delivered a 2.1 per cent return in the past decade.

Measures of volatility and downside risk also showed direct property has held up better than investments in listed property trusts.

The report showed the inclusion of direct property in diversified investment portfolios could reduce the chance of negative annual returns in the portfolio.

Atchison Consultants managing director Ken Atchison said liquidity in property had had a 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.”

Property index specialist IPD confirms the contrast in property investment, with direct property booking a minus 7.2 per cent return in the year to June 2009, while listed property trusts booked a minus 42 per cent return.  Even so, within the trusts, their core real estate holdings delivered a less dramatic minus 7.1 per cent return, IPD director John Garimort said.

“All these other factors – impact of gearing, lack of debt, increased cost of refinancing, other business activities and then the broader stock influences – counted for a truckload, “ he said.