Property in a retirement portfolio
Investing in property – what’s so great about it?
In Australia we love property. At around 6.6 trillion dollars, residential property is the largest asset class in the country, more than four times the size of the share market. Nearly two million Australians own investment property, and it has been a great source of wealth creation for decades.
Residential property is just one type of property investing
Mostly, when an individual investor buys residential property, they have a fairly concentrated portfolio. The average investor owns 1.3 properties, and they usually look to buy in the city where they live. Rental income tends to be fairly low, with the average yield in capital city properties around 3%, and close to 5% in regional areas. And that's before you take out all of the costs of ownership.
Of course the capital growth has been very strong historically and that's what most people are looking for from their property investment.
That said, the growth in dwelling approvals over recent years has been significantly above long-run averages, and while activity has begun to slow over the last year, any impact on prices as the new supply hits the market is probably yet to come.
So how do we do it at StatePlus?
Property investing at StatePlus is a bit different. Depending on the fund, we invest around 6 to 8% of our portfolios in property, with exposure to over a hundred different assets across the country in the office, retail and industrial sectors.
Income from Australian property sectors
| Asset Class | Yield |
|---|---|
| Residential Property - Capital Cities | 3.30% |
| Residential Property - Regions | 4.90% |
| Office - A Grade (Sydney/Melbourne) | 5.25% – 5.5% |
| Industrial | 6.25% – 6.88% |
| Retail | 5.40% |
| Source : Savills, CoreLogic | |
As you can see from this table, yields on these assets tend to be higher than for residential property, and the growing rental income is a much greater proportion of the expected return.
We do expect to see capital growth though, and there are often attractive opportunities for development to unlock value.
A good example of this is at 50 Bridge Street in Sydney, where AMP is redeveloping two office buildings to create an iconic new tower at Circular Quay.
Photo: AMP
The new development will have over 88,000 square metres of office space and unparalleled views of Sydney Harbour.
Property plays an important role in a retirement portfolio. Capital values are much more stable than shares, and rental income is a good source of reliable cashflow.
As with everything in investments though, diversification matters, and it's important not to be too reliant on any one asset class, no matter how well it's performed in the past.
