Provided by Mercer: 14/7/08
Direct property (as opposed to listed property) is hugely popular with Australian investors. Because of its tangible nature it may feel less risky than other investments like shares. But is it?
Returns on investment property take two forms: capital growth and yield. Capital growth comes from an increase in the value of your asset over time. It is usually a long-term consideration. Yield is the income that the property generates right from day one. In most cases this is rental income. The ideal scenario is one where the yield is high enough to generate income over the short-term while capital growth is occurring over the long-term.
March 12 month
2008 (% change)
Median weekly asking rents for houses
Sydney $390 11.00%
Melbourne $350 17.00%
Median rental yield for houses
Sydney 4.14% 3.00%
Melbourne 3.92% -7.00%
Median weekly asking rents for units
Sydney $385 10.00%
Melbourne $300 15.00%
Median rental yield for units
Sydney 5.00% 4.00%
Melbourne 4.70% -1.00%
Source: Australian Property Monitors
What are the risks of making an investment in property?
Property is considered a growth asset class and, in contrast to the old maxim “safe as houses”, has a moderate-to-high risk profile. Returns generated by property are subject to cyclical volatility over time, much like shares. Furthermore, this type of investment has low liquidity, which means that it’s not easy to convert into cash in a hurry.
On the upside, property is typically a solid performer that can be borrowed against to further build your investment portfolio.
Our increasing population has meant that demand for property has outpaced supply, particularly in the inner suburbs of Australia’s major cities. This has resulted in strong capital growth in many areas and rental increases. In recent months, however, housing prices have stabilised, particularly due to rising interest rates1, evidencing the cyclical nature of the investment.
Things to consider
Whilst it’s easy to say that property is generally a “good investment”, it’s more important to determine whether it’s a good investment for you. Consider the following issues:
- Your investment goals over the short and long terms – do you need income, capital growth, or both?
- How you can maximise the tax-effectiveness of your investment, if appropriate
- The liquidity you need from your investments
- Your tolerance for the moderate-to-high risk profile associated with property
- Your overall asset mix – do you have enough diversification?
- Should you buy property direct or use a managed fund (that has a property portfolio)?
- Do you have enough money to buy a property, or are you willing and/or able to borrow to invest?
This last question is important. If you borrow to invest (this is referred to as gearing), it can have an impact on the overall return you obtain in relation to that investment as you have to make loan repayments which involves interest and charges. However, there are taxation implications to gearing and these should also be considered when you look at your overall gain from direct property investment. Other factors to consider in respect of the loan is interest rates, the term of the loan (and how that fits in with your investment timeframe) as well as the features of the loan.
Particularly important is making sure you can service the debt if you were unable to work, for example if you suffered a debilitating illness and you ran out of sick leave (and/ annual leave). Getting your personal insurance in order is vital when you borrow to invest.
Making a decision
You can obtain professional advice in relation to direct property investment. However, in many cases, the best place to start is by talking to a financial planner who can help you work out what the answers to the questions posed mean for you personally.
More information
- To speak with a Mercer financial adviser about borrowing to invest, or to develop an investment strategy to suit you, please call us on 1800 633 403.
- Register to attend a free public seminar on 'Gearing up for investment'.
1 reiv.com
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
