Why property investment?
Most Australians believe that property investment is a safe and secure way to improve their financial position (wealth): knowing that property produces rental income; and expecting that it always generates capital growth. Until they actually experience it, many fail to understand that it also has the capacity to fall in value in adverse economic/ market conditions. Individuals as investors also like the feeling of driving by their property, seeing their investment at work and knowing, regardless of the market conditions, provided they have a good tenant, the returns keep flowing to them.
Major institutions that manage large amounts of money, such as Superannuation funds, life insurance companies and fund managers, usually have some portion of their portfolio invested in property – usually directly, in commercial, retail and industrial assets – either directly or through a trust arrangement, as a diversifier to the portfolio.
If you wish to have a investment portfolio that generates reasonable rates of return at an acceptable level of investment risk, then it is important that your portfolio be diversified – and exposure to property can help with that objective.
How do I make a property investment?
There are basically 4 ways to invest in property:
- Direct Investment – you can purchase a property directly or through a syndicate. This usually requires a large amount of money, your investment is relatively illiquid; and maintenance/ holding costs can erode otherwise surplus cashflow.
- Unlisted Property Trust – you can pool your money with other investors in a unit trust which purchases property on your behalf. If the trust is unlisted, it means that to withdraw your money you need to redeem your units with the manager of the trust. Under particular market conditions, withdrawals may be suspended until sufficient cash is available in the trust to fund withdrawal requests.
- Listed Property Trust – this is a unit trust which pools investor funds to invest in property. However, to make it easy to withdraw your investment, the units are listed for purchase and sale on the Australian Stock Exchange (ASX). Therefore you can only sell your investment if somebody else in the market is prepared to buy your units from you. This is exactly the same as for share investments.
- Property Securities Fund – this is an unlisted unit trust, which pools investor funds to purchase units in listed property trusts. A professional manager researches the market and selects which listed property trusts represent the best value for the investors in the property securities fund. The fund will usually have a spread of listed property trusts in its portfolio to provide exposure to a range of properties and property markets. Some property securities funds also invest in shares in companies involved in property related activities.
Which is the best way to make a property investment?
The answer to this question very much depends on your particular circumstances and requirements. Some people feel very comfortable owning one property directly and are prepared to manage the risks and responsibilities of this form of investment.
However, the average investor is generally better off holding units in property securities funds. They give access to a broad range of property markets including retail, commercial and industrial, without the need to commit a significant portion of funds (owned or borrowed); and with the flexibility of cashing in some or all of the investment at short notice.
Some investors could also consider purchasing units in individual property trusts listed on the ASX. Careful research is obviously required in this area because the price of the listed property trusts is determined by other people’s views on the relative merits of those trusts. As an potential investor, you should ensure you have access to detailed information on the properties in each trust, the profile of their tenants and the rental agreements in place prior to making a decision to invest in this type of investment.
How are property investment funds taxed?
Income from a property fund is taxable in your hands. However, it is likely to include some tax-free and tax-deferred amounts that reduce your tax liability on the income. Capital gains on the units purchased are subject to normal capital gains tax provisions. Please note that tax-free and tax-deferred income may impact the capital gains tax liability of your investment. You should seek professional advice on this matter.
Guidance on suitable property investment strategies
The experienced advisers at Continuum Financial Planners Pty Ltd have a range of clients with individual financial needs, goals and objectives, who call on them for guidance and advice in the development of their strategic wealth management plans, implementation of their investment strategies – and ongoing reviews and consultations on progress toward the achievement of their goals. To make an appointment to meet with one of the team and ensure that an appropriately diversified portfolio of investment assets is working for you, call our office on 07-34213456, or complete the Contact Us form on our website to request an obligatio-free meeting at no cost to you.
(This article was originally posted in February 2010: it has been occasionally updated or refreshed, most recently, in January 2019.)
