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Investing in property - indirectly

Paul Clitheroe
Paul Clitheroe

AUSTRALIANS have always been passionate about property. Commonwealth Bank research in 2013 found bricks and mortar is the number one asset for Australians, accounting for $4 trillion dollars of our collective wealth.

But for those who can't afford to own a rental property, or if you simply don't want the hassle of being a landlord, there is another way to add property to your portfolio.

There is a smorgasbord of choice when it comes to commercial property - like big shopping centres, cinemas or factory complexes.

These can be worthwhile investments too. The trouble is, the cost of owning these property giants puts them out of reach of ordinary, individual investors.

The solution can be to invest indirectly through Australian real estate investment trusts, also known as A-REITs. They used to be called simply, property trusts.

You can invest in A-REITs listed on the stock exchange, buying and selling them through an online broker in much the same way as shares. It's a low cost and very straightforward way to add commercial property to your portfolio. The returns can be healthy - in 2013 for instance, A-REITs delivered an average return for the year of more than 7 per cent, made up of both income and capital growth.

Sure, investing indirectly means you won't be able to feel and touch the buildings in the way that residential landlords can. But the flipside is that you won't waste a good chunk of your capital on big transaction costs like stamp duty, legal fees and building inspections, which is a key drawback of investing in residential property.

One of the strongest points of property trusts is diversification. Some A-REITs focus on industry sectors like hotels; or retail buildings like shopping centres; others invest in warehouses or industrial parks.

If you're keen to add a little more diversity to your portfolio, it's possible to invest in global property funds that invest internationally.

This level of diversification is not possible for the average investor in residential property to achieve. Many landlords own just one, maybe two rental properties, and if they are also home owners, this means they are relying heavily on the fortunes of a single asset class.

The other drawback of investing directly in property is that a single building locks away a large amount of wealth. If you need to access cash at some stage, the entire property may need to be sold whereas with a property trust investors have the flexibility to sell off varying quantities of units - just like you might sell some shares - when funds are needed or if other opportunities become available.

There is no doubt that property is often seen as a safe, tangible and reliable rent generator for investors. A well chosen residential building can certainly be all these things. Bear in mind though that for simplicity, low cost and diversity, property trusts are also worth a look.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

Topics:  investment opinion paul clitheroe property


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