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Diversification

It’s rarely a good idea to put all your eggs in one basket; you never know what the future will hold. Your best bet is to diversify your investments. But we know from experience that the share market is too unstable to assure your financial security and so we throw ourselves into the property market whole-heartedly. The question is: if you only want to invest in property, how do you manage diversification?

Property is the largest real asset class in the world and makes up the largest component of household wealth in Australia. It is an essential asset to any investment portfolio and offers one of the most consistent return rates of any investment strategy.

So, how can I diversify within the property market?

Generally speaking, property can be split into residential and commercial sectors. It can also be directly owned (like your home or investment property for example), indirectly owned through a managed fund, syndication or through a real estate investment trust (REIT). With so many different ownership structures and property sectors there are broad opportunities for investors to get involved.

When Australian investors are seeking to build wealth, or are in the ‘accumulation phase’ before retirement there is a strong urge to invest in high risk investments to make as much profit as possible. These high-risk schemes offer high returns on the surface, but are aptly named. The property market is certainly not as aggressive, but over time the risk is demonstrably low while still offering fantastic returns.

As the investors move into the transition to retirement phase, or even retirement phase – income producing assets become more attractive to balance their portfolio and generate the required income to live as they enjoy retirement. This can be achieved in many ways, such as direct property holdings yielding income or fractional investing. Again, property provides the perfect balance at this point in an investment life cycle, as it’s generally considered lower risk than assets like shares/equities but generates more income than cash.

But where is the opportunity to diversify?

The most common method of investing in property in Australia directly is via a residential property, either owner occupied or as an investment. It’s a popular method as it’s widely available and understood, can offer tax advantages and it’s a tangible and real asset. However, this method does not offer the average Australian much opportunity at diversifying their investment as so much of the available capital is concentrated in one or two assets. Often, direct ownership can also require a significant time commitment in relation to management and maintenance, and in some cases a financial cost if you outsource these tasks.

Alternatives to direct residential property ownership are property trusts, property syndicates and fractional investments. These investment methods can offer many levels of diversification across different property classes, and also geographic locations – as many property markets in Australia have investment cycles independent of each other. Whilst providing opportunity for capital growth, they can also offer property exposure without the substantial capital commitment or debt that are systematic of direct property purchasing. Some funds or syndicates can offer geographic diversification within the one single fund, by holding or developing multiple properties in different regions or even classes.

Property is widely accepted to be an essential part of any investment portfolio. Diversification within property can add balance to this portfolio without varying from the desire to have significant exposure to property as so many Australians do. So while direct property investment is a worthy investment decision, investors with a keen interest in property can consider balancing their property interests via fractional investing that are less capital intensive, but can offer the same investment characteristics that draw investors to the property market in such numbers.