No reason to be scared of investment property

Financial planners are afraid of the investment properties owned by their clients, claims Ark Group chief executive Maurice Goldberg.

The Ark Group researches new residential developments, acts as a real estate agent for them, and includes them in the plans produced by its financial adviser arm — an activity that Goldberg says most planners, “brainwashed” by the cult of managed funds and modern portfolio theory, have no idea how to do.

“There’s no more than a few paragraphs on residential property and loan broking in the diploma of financial planning — there should be whole modules on both,” he says, arguing this is a lost opportunity for advisers.

“If financial planners treated investment properties as if they were FSR-regulated products, they could take the mantle away from real estate agents, who have nowhere near as much regulation.”

The national research manager for Professional Investor Services, Mark Teale, confirms that his dealer group (like most others) has no official policy on how an investment property should be incorporated into a financial plan.

“We leave it up to each adviser, but obviously we don’t think a retired couple’s holiday home should make up their entire property exposure. It’s probably negatively geared, and you’d be seriously depleting their income if you didn’t put some listed property and direct funds in their asset mix,” Teale says.

However, Goldberg counters that many people from the pre-compulsory super era need to focus on capital growth, and fast.

“The most you can gear shares or property investment vehicles is about 1 to 1 — but property you can comfortably gear up to 10 to 1, as in the 10 per cent deposit. People in some situations need that kind of accelerated growth if they’re to maintain their standard of living in retirement.”

“Near retirement, people could buy a neutrally or positively geared property and use the sale of that property as a ‘parachute’ when their other assets are running out,” Goldberg explains.

As long as you are in it for the long term, can be reasonably sure you won’t be forced to sell, and have access to thorough research, Goldberg says investment property is an asset class as safe as any other.

He points to the average after-tax experience for someone on the top marginal rate over the 20 years to December 2003 — 11.6 per cent returns for residential investment property, 10 per cent for Australian shares and 8.5 per cent for listed property.

But the naysayers will take some silencing. Managed Investment Assessment’s Anton Lawrence points out that rising interest rates will make investment properties harder to neutrally or positively gear, and to him less attractive in a portfolio regardless of any tax perks.

“I’ve never understood the fundamentals of why you would go out and borrow money that costs more than the equity you can put into the property,” he says.