Perpetual positive on residential property investment
Perpetual has recently released its Australian Property Outlook – September 2007. We set out below the key points from Perpetual’s Special Feature on residential investment. These highlight the benefits of investment in residential property.
Over the 15 years to December 2006, comparing residential investment with Listed Property Trusts (LPTs), Equities, and Bonds:
1. Gross annual returns are comparable (although, as Compass Capital Property Group have advised in previous reports, once account is taken of (a) the greater capacity to leverage into residential property, and (b) tax benefits, the comparative returns of direct residential investment are greatly enhanced).
Total Annual return |
Residential |
LPTs |
Equities |
Bonds |
12% |
14% |
13% |
7% |
2. Risk is lower
Volatility (% pa) |
Residential |
LPTs |
Equities |
Bonds |
4.1% |
9.5% |
10.4% |
5.6% |
3. The Reward/Risk ratio is higher
Return/Volatility Ratio |
Residential |
LPTs |
Equities |
Bonds |
3.0 |
1.5 |
1.2 |
1.3 |
4. Downside risk is effectively eliminated (semi‑deviation of returns below zero)
Downside Risk |
Residential |
LPTs |
Equities |
Bonds |
0 |
2.4 |
2.7 |
2.2 |
5. Residential investment cycles run countercyclical to other categories, providing diversification benefits from including residential property investment in a balanced portfolio
Correlation analysis |
Residential |
LPTs |
Equities |
Bonds |
1 |
-0.19 |
-0.22 |
-0.27 |
6. Capital growth from residential is substantial even if the investor makes the purchase at “worst possible time” i.e. at the peak of the last five residential property cycles, provided that they can wait until the next peak.
Buy at the peak |
Best Outcome |
Annual price appreciation |
Years held |
Jun-77 |
11.8% |
3.75 |
Dec-81 |
12.1% |
7.5 |
Jun-89 |
4.3% |
10 |
Dec-94 |
10.4% |
9 |
Mar-04 |
6.3% |
9.75 |
7. Capital loss is modest even if the investor, having bought at the worst possible time, is then forced to sell at the worst possible time.
Buy at the peak |
Worst Outcome |
Annual price appreciation |
Years held |
Jun-77 |
0% |
1.25 |
Dec-81 |
-2.1% |
1 |
Jun-89 |
-3.7% |
1.25 |
Dec-94 |
-3.1% |
1 |
Mar-04 |
-4.6% |
1 |
8. Current vacancies are extremely low
Perpetual states that “Current levels of residential undersupply have pushed vacancies to around 1% in most of the major metropolitan markets around the country, well below generally accepted equilibrium levels” (the equilibrium level is about 3%).
What does this mean
Compass Capital Property Group believe that the Perpetual analysis supports our view that direct residential investment is a very attractive investment, providing consistently high returns (especially when account is taken of benefits arising from leverage and tax), low risk, and diversification.
Now is an excellent time to buy, particularly in Sydney where prices have been flat since 2003 and are now just starting to rise (see previous reports).
Should you wish to consider acquiring residential investment property before the market accelerates, please contact us to discuss some very attractive opportunities in most price brackets, including off‑the‑plan. Gross yields are usually 4-5% and in some cases have rental guarantees for two years or more.
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