Land to spread out

Investing heavily in standard real estate may be too much of a good thing, writes Anthony Keane

PROPERTY’S popularity as an investment continues to grow, and you don’t need to spend hundreds of thousands of dollars to get your foot in the door.

A rising number of real estate options are opening to investors, either as individuals or inside their superannuation funds.

However, some advisers warn that people may take on too much risk by putting all their eggs in one property basket – given many already have their own homes.

Australian Taxation Office data shows that the value of residential property held by self-managed super funds has jumped 75 per cent since 2012 to $28 billion. The use of limited recourse borrowing arrangements – typically used to buy real estate in super – has grown tenfold to $25.7 billion. The Commonwealth Bank’s head of SMSF customers, Marcus Evans, said investors had been drawn to property as shares struggled in the past decade while property prices in some cities went “ballistic”. “The danger for people early in their investment journey is if they are not diversified enough. When these longer cycles turn, they could find themselves with underperforming assets,” he said. “There’s nothing wrong with property, but if you are talking about long-term investment, you really need to consider diversification.” Investors can easily diversify their property holdings, through:

• Property trusts, now called real estate investment trusts (REITs), which pool people’s money in a range of commercial real estate including offices, industrial, retail and hotels.

• Managed funds, which use professionals to choose the property investments.

• Exchange traded funds, which generally take a more passive approach by tracing stocks in a sharemarket index, such as all the REITs in the ASX 200 index.

• Fractional investing, a new area where investors buy small pieces of one property and share in its expenses, income and growth.

“You can be exposed to different property markets, different property types and different countries,” Mr Evans said.

“If you have one house anywhere, you are either 100 per cent in the house or 100 per cent out of the house. The costs of doing that are substantial compared to more liquid exchange-based investments.”

Mr Evans said he liked the concept of fractional investing, but warned it was yet to experience a property downturn.

Catapult Wealth financial planner John Lawler said people looking to diversify their property exposure should consider their risk tolerance, the tax impacts and seek good advice.

“People selling you something will tell you what they expect the return to be, but they will never quantify the risk,” Mr Lawler said.

He recommended avoiding overly complex property investments. “Every time you build complexity, the more things can break,” he said.

“Look for a manager who’s been around for a good period of time, preferably one that has been through the GFC and come out the other side. Very few came out the other side.”