Direct property comes out on top

A new research report has claimed that over the long term, direct property has delivered the highest level of income and the best risk adjusted returns of all the major asset classes.

The Investment Performance Report, conducted by Atchison Consultants on behalf of the Australian Direct Property Investment Association, incorporated Australian shares, overseas shares, residential property, listed property, Australian fixed interest, Australian cash, managed funds and direct property in its analysis and showed that over the past 10 years to December 2007, direct property provided the highest level of income returns (7.1 per cent per annum) while having a low volatility level of 0.2 per cent.

In comparison, Australian shares provided an income return of 3.7 per cent, with 1.2 per cent volatility, while international shares returned 1.4 per cent, the lowest of all the asset classes, but with an equally low 0.2 per cent income volatility.

On a risk adjusted basis, direct property still provided the highest returns, according to the ‘Sharpe ratio’, which calculates the ratio of additional returns above the risk free rate, being measured as the cash return, to the additional volatility of returns. A ranking above 0.5 on the Sharpe ratio is considered to be good.

In breaking down the different sectors of direct property, industrial property was the standout performer with a ratio of 5.25.

Australian shares had a Sharpe ratio of 0.75 during the same period, while its international counterpart scored negative 1.4.

Atchison Consultants managing director Ken Atchison believes the inclusion of direct property in a diversified investment portfolio can greatly enhance the prospect of avoiding negative annual returns.

“The study shows that investors should be increasing property allocations from 5 and 10 per cent to 20 per cent in balanced, growth and high growth portfolios,” he said.

“When negative returns are reduced it is less likely the investors will take inappropriate defensive investment decisions as a response and will focus on longer term objectives.”