For self-managed superannuation fund (SMSF) investors, getting the right balance of growth and defensive investments is a dynamic challenge. Importantly, with careful consideration, the right portfolio mix can achieve both higher returns and create lower overall risk.
As markets around the world continue to present a ‘low growth’ outlook, investing in direct unlisted property is increasingly pushing a case for inclusion in SMSF portfolios as a relatively high yielding investment.
Many SMSF investors automatically think ‘residential property’ or their business premises when they think of an investment in property.
Increasingly, however, SMSFs are looking at property investing through unlisted, pooled managed funds. Under this scenario, the managed fund will typically own and lease commercial real estate assets, such as office buildings, industrial warehouses, retail shopping centres or private hospitals.
When it comes to structuring an SMSF investment portfolio – particularly in the later years as trustees contemplate the critical stage of transitioning to pension phase – an investment into unlisted property can complement other investments and help to mitigate risk.
Investment into unlisted property can also increase the probability of more predictable, more consistent returns.
The longevity dilemma – it’s no longer safe to be conservative
Looking towards retirement, one of the biggest concerns held by SMSF investors is typically whether their savings will be enough to adequately support their lifestyle in retirement.
‘Longevity risk’ is well known as the risk that a retiree’s funds will run out early.
Traditionally, as SMSF investors approached retirement, many automatically adopted a strategy of moving their portfolio away from growth investments – such as shares and property – into defensive assets – such as fixed interest and cash. Prior to the GFC, this was often viewed as practical because nominal economic growth rates, as well as cash and bond rates, were generally high enough that investors could expect a reasonable investment return to endure a long and sustainable retirement.
Today, investors are faced with a new reality.
Following a 30-year bull market in fixed income and the Reserve Bank of Australia pursuing a strategy of historically low interest rates, the risk versus return dynamic on bonds is emerging as decidedly negative.
This has created a significant yield premium for unlisted property. Chart 1 below shows the dramatic spread between various commercial property sectors and the 10-year Australian Commonwealth Government bond at 30 June 2013. As the chart displays, the yield premium for the past year has increased dramatically compared to the five-year time period.
Direct property can lessen portfolio risk and enhance return
In today’s investment environment, a direct property investment can also work as part of a diverse SMSF portfolio to maintain exposure to growth assets and simultaneously reduce the impact of prospective negative returns.
A study by Property Funds Australia found there was a relatively weak correlation between returns of Australian shares and direct property.
One of the benefits of this low correlation for SMSF investors, particularly those looking to extend their exposure to growth assets into retirement, is that they can lower the probability of negative annual returns by including and potentially increasing their allocation to direct property as part of a diversified investment portfolio (see Chart 2).
Support for the inclusion of greater allocations to direct property over time in SMSFs is also found in the ASX’s ‘Five-star super strategies’, which was rolled out as part of the exchange’s major SMSF roadshow in June 2011. As portfolio allocations evolved over time from high growth to a more conservative investment style, the allocation to direct Australian property increased while the allocation to other growth assets – such as Australian and international shares – declined.
Ryan Banting is the Head of Portfolio Management at Australian Unity Real Estate Investment.
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Australian Unity Investments offers investors a variety of unlisted property funds. These cover assets including healthcare, office, retail and industrial property. For more information about our unlisted property funds, refer to australianunityinvestments.com.au. To find out whether an SMSF is right for your investment circumstances, please consult a professional financial adviser. |
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