Home Truths AN APARTMENT IN THE CITY, A HOME IN THE COUNTRY AND A RENTAL PLACE IN THE ’BURBS. THAT’S THE DREAM. BUT BEFORE YOU PACK YOUR PORTFOLIO WITH PROPERTY, CONSIDER THESE TIPS FOR THE YEAR AHEAD. BY SALLY AULD, CHIEF INVESTMENT OFFICER, JBWERE
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THE LUXURY REPORT | SUMMER 2021/22
it tends to be less liquid, especially if prices are declining. Moreover, the asset class itself is not fungible; for example, an inner-city apartment in Melbourne is quite different to a detached dwelling in Rockhampton or a harbourside property in Sydney. Plus, there are nontrivial transaction costs involved when entering and exiting the market (stamp duty, agency fees), which is not always the case with other financial assets. On the upside, you usually have more leverage with residential property, and investors and owner-occupiers alike have access to significant tax advantages, including negative gearing and capital gains tax exemptions.
Putting together a portfolio
Housing is the largest component of a household balance sheet.
Our analysis shows that the addition of domestic residential property to a theoretical 60/40 portfolio (60% growth assets, 40% defensive assets) would have reduced the volatility of portfolio returns over the last 20 years. Particularly during periods of turbulence in equity markets, we see that an allocation to residential property reduces the overall variability of portfolio returns, as drawdowns are generally less pronounced in periods of risk aversion. However, when risk markets are performing well, we observe more upside in a portfolio that does not include residential property.
ILLUSTRATION: COL MCELWAINE
WHAT ROLE SHOULD residential property play in an investment portfolio? It’s a question often asked of my wealth-management colleagues at JBWere. Property is undoubtedly a strong asset — over the past 20 years, residential property has tended to deliver better risk-adjusted returns than other asset classes — but there are significant differences between property and, say, shares or bonds. Australians have a relatively high rate of home ownership compared with the citizenry of other G20 countries. Data from the OECD suggests that about 30% of Australians own their property outright, while about 33% have a mortgage and the remainder rent. Housing is, by far, the largest component of a household balance sheet in Australia, both on the asset and liability side. About 53% of gross household assets are held in land and dwellings (superannuation assets are the next biggest holding, at 23%). Of course, returns vary according to a property’s use. For investors, there’s capital gain and rental yield. For owner-occupiers, the total return is simply capital gain — similar to owning gold or a venture capital investment — as there’s no explicit income stream (although it could be argued that owner-occupiers benefit from a stream of imputed rents). One issue with this kind of asset is that
