Direct property makes a comeback

There are a number of ways for investors to get into property, via REITS or LPT's is one way, or unlisted trusts of funds, another way is direct property where you invest directly in the physical asset usual in a "unit" for example.  

Atchison consulting undertook analysis of Direct Property as a part of an investors investment mix (we quote their research often, and again in the following article it is easy to see why).  In their research which accounted for 10 year and 20 year returns, cost per $100,000, volatility and risk for reward they noted that - for example; if a an investor had 25-30% of their portfolio in "direct property", the risk of negative returns went from 1 in 10 years to 1 in 44.

To get exposure to property; which is Australia's largest asset class, you don't have to invest in REIT's and LPT's - and clearly the returns haven't been there for the past 10 years with 2.8% per annum; direct property can be invested in via a manager or preferably, why not buy direct property yourself (by passing the fund or trust) and get the full benefit of time in market, income growth, tax advantage and wealth creation (capital growth). Funding costs are much lower than leveraging into the stock market as well.  

Understandably you need to buy an asset that will provide smoothing through cycles and that fits your invest style and risk profile.  That's why it pays to invest in property advice, the same advice you will pay for indirectly when you invest in a REIT, LPT, Listed/Unlisted Fund for example.  

The benefit of investing in property advice, is that unlike an invest manager working for a fund - whose decisions will usually be driven by technical rather than fundamental analysis and the "numbers" (including gearing and valuations); you will get tailored recommendations and advice that fit your specific requirements and meet your budget, giving you total control over "your direct property investment" and you wont pay on going fees either.

The article taken from the Financial Standard today reads;

A number of super funds including Professional Associations Super, Asset Super, Sunsuper and AustralianSuper have added their exposure to direct property in recent months, Rainmaker research shows.

Direct property is back en vogue as investors look outside listed real estate and lock in higher returns - and a quick glance at the numbers show the reasons why. 

Rainmaker analysis of returns over rolling 12-month and 5-year periods noted that direct property has been significantly less volatile than its listed counterparts since the GFC. It also delivered higher returns.

For example, the Financial Standard WS Direct Property Index has outperformed the ASX200 Accumulation Index and the ASX200 A-REIT Index in 2, 5 and 10 year periods to June 30th, Rainmaker figures show.

Over a 10-year period, direct property has returned 8.8 per annum, more than treble the returns of listed property over the same period, with 2.8 per cent.

Meanwhile, the correlation between listed property and conventional equities has increased dramatically since the GFC, undermining claims that LPTs offer investors diversification from equities.

David Hartley, chief executive of $15 billion plus industry fund SunSuper, said that the role of direct property in his portfolio had been validated by its performance during the GFC.

"Our direct property got marked down in value (during the GFC) but the cashflows remained pretty solid,' he explained.

SunSuper has over $1 billion invested in domestic property and all of it direct, with Hartley confirming the fund does not have any exposure to A-REITs.

He said that in the asset allocation process, REITs did not necessarily offer enough of a difference to ordinary equities.

"Why would it be REITs, why not tech, or resources? What's so special about REITs when they have been converted from the underlying property into something quite different?" he asked.

John McDuling

Our $100 million bet for Grantham | Christopher Joye | Commentary | Business Spectator

The Wall Street Journal recently covered Rismark’s ongoing debate with investment legend Jeremy Grantham, of GMO, regarding his spurious claims about Australia’s housing market.

Mr Grantham has triggered a tsunami of global media attention by alleging that the Australian housing market is a “time bomb” and overvalued by 42 per cent on the basis of his belief that Australian dwelling prices are “7.5 times family income”. To quote one News Limited report:

“[Mr Grantham] said yesterday Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend. "You cannot possibly miss it," he said. "The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or …7.5 (times). "Australia is having one now. You are at near 7.5 times family income…which suggests you are twice the size that you should be." In Australia's case, Mr Grantham described the housing market as a "time bomb" just waiting for interest rates to increase and become impossible to support…If the Australian housing market did not return to the normal multiple of family income, he said "it will be the first time in history." "Sooner or later, the rates will go up and the game is over."”

In response, Rismark has dispassionately presented the hard empirical data that shows Mr Grantham got his maths wrong. Australia’s dwelling price-to-income ratio is not 7.5 times, as Mr Grantham would have us believe. Based on the best available measures, it is just 4.6 times as at June 2010 (and likely to decline in the third quarter). Furthermore, this 4.6 times estimate has been independently verified by the Reserve Bank of Australia, Goldman Sachs, Westpac, CBA, ANZ, HSBC and other third-parties.

The Deputy Governor of the Reserve Bank has also dismissed Grantham’s claims, commenting, “People feel that house prices in Australia are quite high…But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries.”

Nonetheless, Mr Grantham is in good company. The Economist newspaper concluded in October this year that the Australian housing market was the most overvalued – by 62.3 per cent – of the 20 countries they track. Morgan Stanley’s Gerard Minack is another comrade-in-arms, arguing that “Australia’s debt-fuelled housing market remains a major macro risk” with house prices around “40 per cent above fair value.”

So we would ask Mr Grantham to cease and desist from the hyperbolic jawboning. GMO currently manages $US104 billion (slightly less in AUD terms). If you have conviction regarding your predictions about the “time-bomb” that is Australia’s $3.5 trillion housing market, we would ask that you put your money where you mouth is.

This is the deal. Rismark believes it can facilitate a transaction whereby Mr Grantham will be able to invest $100 million into a short position over the RP Data-Rismark Australian capital cities dwelling price index, which is universally regarded as the most accurate and timely house price benchmark in the market.

Following a torrent a criticism, Mr Grantham appears to have placed tentative conditions on his extraordinary assertions, opining that, “In Australia’s case, the timing and speed of the decline is very uncertain, but the outcome is inevitable.”

Recognising Mr Grantham’s equivocality, we will give him lots of time – three years, in fact. That is, he would be able to invest his $100 million for a three-year horizon against RP Data-Rismark’s Australian capital cities dwelling price index.

Mr Grantham’s investment would be structured as a very simple “delta-one” transaction: for every 1 per cent fall in the index, Mr Grantham would receive $1 million. Conversely, for every 1 per cent rise in the index, Mr Grantham would pay $1 million away. The trade would be settled at the end of three years with monthly margining to manage credit risk.

To be clear, Rismark would need to work pro-actively with Mr Grantham to construct this transaction. We believe we have counterparties that would likely be prepared to contract with him. But it may take several months to facilitate (and cannot be guaranteed).

Before we can proceed, we require a firm, contractually-binding commitment from Mr Grantham that should we be able to facilitate this transaction, if he will indeed act on the advice that he’s offered to the rest of the world by committing a tiny fraction – less than 1 per cent – of his capital to his predictions.

Rismark’s housing forecasts have been consistently accurate. In contrast to The Economist, and other doomsayers, Rismark correctly anticipated the very modest 3-4 per cent peak-to-trough downturn that the Australian market experienced in 2008.

In 2009 we projected that the market would surprise on the upside with the strength of its recovery, as it did. And since the start of 2010, we have been forecasting that the market would stop growing in the second half of the year, which is what has transpired.

Looking ahead, we are relatively bearish over the next circa 12 months on capital growth, and think that if the RBA does raise the target cash rate in line with the consensus economist estimate of 5.5 per cent, Australian dwelling prices will be placed under modest downward pressure. We recently disclosed analysis that showed that on the five previous occasions that the RBA had aggressively lifted interest rates since 1993, dwelling prices had fallen. Rismark does not expect this time to be any different. Through the cycle, however, we believe that dwelling prices will broadly grow in line with disposable household incomes, as they have done in the past. Total returns, including net returns, should be higher again.

Christopher Joye is managing director of research group Rismark International which produces the RP Data-Rismark Hedonic House Price Indices. Rismark also operates a series of funds that invest in residential mortgages.

Aussie Macro Moments: Jeremy Grantham gets it wrong, again...

Aussie Macro Moments: Jeremy Grantham gets it wrong, again...

Interest rates have gone up, so what do you do?

Our October market report was distributed last week in advance of the RBA announcement. Unfortunately in it, we picked that interest rates would rise on Tuesday, this is where we are in the cycle - interest rates ticking up! Like all cycles, they will also tick down over time. Why is this unfortunate - because I imagine this is what you want to hear.

Our assessment of interest rates rising was loosely based on technicals and majoratively influenced by fundamentals, the RBA's decisions are thought to be based solely on what they see through the rear vision mirror but this is simply not the case. Interest rates can only change once a month and just because adjusted CPI was 2.8% for the year and 0.7% for September (it was 0.6% for August) as far as the RBA were concerned it is at the high end of the target range and on a monthly basis - ticking up on the run into the Christmas period. We think the RBA in part, are concerned about the economies capacity and expected wages growth in 2011,. The RBA saw savings increase for the last quarter, they have seen a restraint in house price growth - and would like to keep it that way for the moment. Now if they get it wrong, we don't go to hell in a hand basket, rates can come down just as quickly as they go up and they don't have to come down in the same increments they went up (usually 25bps). The RBA have proven a willingness to relax rates quickly if required, consumer sentiment responds very quickly to what it perceives as the right message, rates going down would be such a message. For some reason, most people think that because rates are going up they are going to stay up, this is just not true. Most people seem to take a ten year (or longer) view on an interest decision - they go up and down they are not forever, people also confuse interest rate and property cycles with the bourse - neither of the former move up and down with the same volatility as the latter. What people are better to do - in our opinion, is form a view as to whether they see opportunity for them, does your cash flow permit a hold, even with a further full 1% interest increase - with a certain amount of comfort (does it fit your appetite for risk)? What savings can you make on your purchase today due to higher rates as opposed to paying a premium in a lower rate environment with more competition? If you are an investor, how do the yields compare - although capital growth may be constrained today; what does a 5-7 year investment horizon look like (bearing in mind affordability is seeing people rent for longer or delay the upgrade, adding to rental supply compression), does the tax offset work for you? Have you bought the asset well, to manage the down side risk? have you considered a fixed/variable loan, to deliver you more interest rate smoothing (interestingly though, over a 5 year time frame, if you were 100% variable, your cost of funds would have been cheaper than had you fixed)?


We think the rate rise presents good opportunities for astute buyers (some will say "you always say its a good time to buy" - and it is always a good time to buy; it just depends on the strategy employed at the stage of the cycle we are in at the time - property and interest rates; and knowing how to capitalise on these opportunities while managing downside risk). Its not about what the RBA do - we have no control over that and conjecture adds no value at all in our view; its how we respond as opposed to react. The following ABS data is interesting, on the one hand it suggests the persistence of the problem (supply) but looked at another way, it provides opportunities - certainly in the near term (rising rates), beyond that - who knows!


The ABS this week released building approval numbers for September 2010. On a seasonally adjusted basis, total dwelling approvals fell by -6.6% for the month, annually total approvals are down by -11.6% and this week’s interest rate hike will likely further dampen building approval numbers in the coming months. Private sector dwelling approvals have fared quite poorly also. Private sector house approvals are down by -2.3% for the month and are -14.1% lower over the year. Private sector unit approvals had been quite buoyant over recent months however, they recorded a sharp decline of -15.7% during September and are down by -0.6% for the year. In summary, under supply persisted - this contributes to rising rents as would be buyers stay put; it constipates the supply chain (people don't move up the chain, its as much a top down issue as a bottom up one) and in many instances vendors need to adjust their expectations downwards. This pressure usually puts upward pressure on prices as demand exceeds supply. At the moment however, as demand has retreated due to rising interest rates, price is coming down, lack of competition has and is eroding the premiums that vendors have been getting. Buyers can therefore expect discounts and the purchase price savings also translate into savings on stamp duty.

Unit yields in certain areas of the prime market are 5.2% + and house yields (terraces, semi's, freestanding homes) are circa 4%. In a normal market, house yields are between 2-3%...



Check out our latest market report Rose & Jones October Market Report