Investors illogical on direct property
New research has revealed the illogical nature of allocating only a small percentage of an investment portfolio to direct property, which in the past decade has provided the highest level of income returns of any asset class.
The report, commissioned by the Australian Direct Property Investment Association (ADPIA), showed that investors with property allocations of 5 to 10 per cent should increase these allocations to 20 per cent in balanced, growth and high growth portfolios.
Ken Atchison, managing director of Atchison Consultants, the independent researcher that undertook the study, said direct property allocations had been declining since the 1980s, despite the asset class delivering strong total returns of 9.5 per cent with the lowest volatility of income returns of any asset class.
“[This decline is because] people respond to and make the wrong decisions during negative market events — the intent of investment is to buy low and sell high, but psychology tells you to buy high and sell low,” Atchison said in relation to investors who join the bandwagon when an investment is at its peak and then sell it when it crashes.
He went on to say direct property also outshone the majority of asset classes with the best risk-adjusted returns and lowest downside risk over 10 years to June 2006, suggesting an increased level of direct property in a portfolio should significantly reduce the prospect of a negative annual return.
The research also found that unlike some other asset classes, direct property had been stable in all annual periods, even in times of negative market cycles.
Furthermore, Atchison said it provided a sound basis for gearing, due to secure income streams coming from long-term tenants.
Geared direct property produced an inferred return of 15.6 per cent in the past 10 years — the highest returns of all asset classes.
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