Investors should diversify their assets
Residential real estate has delivered pretty slim returns in the past year or so, but there's one group of property investors who have been basking in some welcome financial sunshine.
Property trusts have provided capital growth of 26 per cent in 12 months and they’re generally paying incomes of between 5.5 and 8 per cent a year.
Compare this with flat or negative growth for direct housing investment and moderate rental returns and these trusts – which are listed on the share market – look brilliant.
Now widely known as real estate investment trusts (but they’ll always be property trusts in my heart), they invest in commercial, residential and industrial real estate by pooling investors’ money together to buy big assets. Their assets range from apartment towers and supermarkets to Bunnings hardware warehouse stores and Westfield shopping centres.
However, before you rush to sell your investment property and pile your money into property trusts, here are a few words of warning.
Number one: Property trusts can be vastly more volatile than housing investment. They were a market darling for much of the last decade before things went pear-shaped during the global financial crisis.
I was among many thousands of investors who got badly burnt when some of our biggest property trusts plunged more than 80 per cent. Others collapsed. It was not pretty. And many of the property trust prices today are still only worth a fraction of what they were five years ago.
Number two: You’re not going to get a bank to lend against your property trust holdings like they do against real property you own. This can affect any strategies to grow your property portfolio, as they don’t hold a mortgage over your trust investments because you can sell them on-market at any time.
Number three: You have little control over the investment decisions, so you have to trust the people running them. Investors’ faith was sorely tested – and in many cases shattered – when the trust managers borrowed heavily to fund growth in the 2000s only to see things come crashing down in 2008 and 2009.
Of course, this doesn’t mean you should avoid property trusts. Every investor should diversify their assets and having investment exposure to things such as offices, warehouses, shops and apartment buildings can smooth out the effects of your direct housing investments.
Just invest with your eyes open, don’t put all your eggs in one basket and have a clear strategy about how you want to approach it.
Anthony Keane is editor of Your Money, which appears in News Limited newspapers on Mondays.
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Eyes open: When you decide to invest, have a plan and donít put all your eggs in one basket. Picture: THINKSTOCK