Diversifying into international property would have delivered Australian investors five times the return for half the risk compared to an all-domestic portfolio during the property bust of 1990 to 1994, while yielding the same return for 40 per cent less risk between 1985 and 2004.
These are the main findings of Macquarie Property’s attempts to create a perfect asset allocation, or “efficient frontier”, for the real estate asset class.
Usually a concept more at home in modelling equity portfolios, Macquarie’s “efficient frontier” shows that during all stages of the property cycle, an even diversification across property in the major regions significantly increased returns and decreased risk.
“By taking advantage of lags in timing in the different property and economic cycles, an investor can insulate a portfolio from some of the domestic ups and downs,” said head of Macquarie Property Research, Rod Cornish.
“We are strong believers in cycles and on balance cycles are here to stay – even considering shifts in major leading indicators including the influence of the global real estate markets, the future will be more like the past,” Cornish continued.
The domestic office cycle is certainly behaving as expected, recovering in line with global office markets and producing leasing demand in the major capitals which is as strong as it has been for four years.
Industrial is another sector providing opportunity, with sites located near new infrastructure (such as Arndell Park near Sydney’s Westlink M7) booming last year and poised for solid if unspectacular growth in 2005, according to Macquarie.
The residential and retail sectors are less fertile ground in the year ahead, with Macquarie pointing to interest rate risk in the former and the top of the cycle being reached last year in the latter.
