There’s little doubt that property is an attractive investment option for many, but with the media reporting conflicting news about the Australian property sector, it’s difficult to understand what’s really going on.
Many people considering an investment in property have a preference for direct property; residential, industrial or commercial. Among other reasons, this popularity may be driven by an economy that is currently living with record low interest rates.
Alternatively, property trusts offer small-scale investors the opportunity to invest in properties not directly accessible to them, such as large retail developments or overseas projects.
Over recent years, however, there’s been increasing confusion among commentators about just where Australian property sits on the boom and bust cycle. Who do you believe?
Then and now
This table shows the average returns for Australian direct property compared with Australian property trusts from 2007 to 2014.
| Year: | Property Trust | Direct Property
(Income) |
Direct Property
(Capital Return) |
| 2007 | 25.9% | 7.5% | 10.5% |
| 2008 | -36.3% | 8.0% | -5.5% |
| 2009 | -42.3% | 0.0% | -8.5% |
| 2010 | 13.8% | -1.5% | 2.0% |
| 2011 | 5.8% | 8.0% | 2.5% |
| 2012 | -7.0% | 7.5% | 1.5% |
| 2013 | 7.3% | 6.0% | 7.0% |
| 2014 | 27.0% | 3.5% | 9.8% |
It is evident that while income returns from direct property have remained reasonably stable, the capital value of the property sector has experienced its fair share of ups and downs.
This second table compares the property trust sector with Australian shares. It is possible to see that both have experienced low points but no general pattern of recovery is discernable.
| Year: | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
| Shares: | 30.3% | -12.1% | -22.1% | 20.4% | 12.2% | 11.0% | 24.2% | 5.3% |
| Property: | 25.9% | -36.3% | -42.3% | 13.8% | 5.8% | -7.0% | 20.7% | 26.8% |
Investment bank Goldman Sachs estimates that markets in Sydney and Melbourne are almost 20 per cent overvalued while Morgan Stanley believes prices have peaked. The International Monetary Fund and the Australian Prudential Regulation Authority surmise some correction in prices is likely however both support government intervention to prevent any major impact on the housing or banking sectors.
The biggest trigger for a downturn in property prices will be the flow-on effect from the slowing of the Chinese economy. Paradoxically, a downturn in China is likely to see investor funds flow from China into the Australian property market, propping up prices.
As with all investments, there is a need for diligence. Determining if property investment is the way forward for you is only part of the question. Whether it’s direct property or a property trust is another option.
Property tends to have a higher emotional attachment than other assets, so it’s wise to speak to us, your independent licensed financial adviser to obtain a clearer perspective before you make a final decision.