How to get property exposure without buying real estate

How to get property exposure without buying real estate

Amid the housing supply crisis, investors are turning to exchange-traded funds and real estate investment trusts for critical property exposure. But how do they stack up?

 

Fewer and fewer Australians own a property. Census data in 2021 shows a national homeownership rate of 67 per cent, down from 70 per cent in 2006. For younger generations, the decline is even more stark, with just half the population among those aged 30-34 owning a home, down from 64 per cent in 1971.

Many young workers are not only priced out of the housing market, but no longer view homeownership as a desirable goal or foundation of wealth creation, according to new research from demographer McCrindle and wealth manager Insignia Financial.

Millennials are not the only ones eschewing bricks and mortar. At the other end of the spectrum, established landlords are starting to sell as inflation takes its toll on maintenance costs, material and rental yields. And homeowning Baby Boomers are under pressure from governments and activists to downsize to free up housing supply.

But just because you can’t afford a house, no longer believe in the “Australian dream” or are just sick of the burdens and costs of being a landlord doesn’t mean you have to forgo critical property exposure in your portfolio.

Financial advisers say the sharemarket offers plenty of options – from exchange-traded funds and traditional ASX-listed real estate investment trusts (A-REITs) to individual stocks with property links. And it’s definitely an asset class you want to include, the experts say.

“Real estate investments may respond differently to market conditions than shares and bonds,” says Antoinette Mullins, a certified financial planner at Steps Financial. “There is a low correlation between it and other asset classes, so investors can use it to potentially reduce overall risk and volatility of the portfolio by smoothing out returns.

“Including listed property can generate stable and predictable income in the form of rental yields, which is an important consideration for those in pension phase, for example.”

Fellow certified financial planner Helen Nan of Compound Freedom agrees.

“Homeownership has traditionally been seen as part of the ‘great Australian dream’, providing individuals with a place to call their own and the ability to make decisions regarding the property, such as selling, renting, or renovating, to generate potential profits,” she says.

“However, the direct property is relatively illiquid, meaning it may take time to sell and convert into cash. While it offers value as a long-term investment, it is not a readily liquid asset. Direct property ownership also involves high initial costs.”

She says homeownership is really more of a “lifestyle choice” than an investment per se, given a personal residence doesn’t produce an income. And even if the property is an investment, there are still a long list of associated costs, such as agent fees and stamp duty.

That’s why a growing number are turning to listed property securities. The traditional A-REIT market is significant, with at least $100 billion invested across 50 trusts, according to the Australian Securities Exchange. Property ETFs are much newer, but have grown by 16 per cent a year over the past five years and now have a collective $3.6 billion, according to online investment adviser and analyst Stockspot.

Property ETFs and A-REITs have different characteristics and choosing between them can be tricky.

The main difference, Marc Jocum of Stockspot explains, is that the ETFs tend to be more diversified – that is, they provide broad exposure to a bunch of A-REITs and property-related securities. REITs and individual stocks tend to represent a sub-sector or smaller slice of the property market.

 

Also, ETFs are generally passively managed, meaning they mimic the performance of the underlying index and don’t try to beat it. Of the four property funds trading on the ASX, three are passive: the VanEck Australian Property ETF (MVA), Vanguard Australian Property Securities Index ETF (VAP) and State Street’s SPDR S&P/ASX 200 Listed Property ETF (SLF).

A fourth fund, the BetaShares Martin Currie Real Income Fund is actively managed (and has a broader remit than just property, also including infrastructure and utilities assets).

Nan says passive property ETFs are probably a better bet for most investors than their A-REIT peers. “Active management can be challenging in an efficient market where it is difficult to consistently outperform the market over the long term. Additionally, management fees for actively managed funds may be higher compared to passive ETFs,” she says.

“However, there are specific situations where active management can be beneficial. For example, if investors have specific goals to achieve, such as generating a certain level of income for retirees, an active management style may play a more significant role.”

Sam Woodhouse, a certified financial planner at Intune Financial Services, says both have merits and are appropriate for different types of investors. A passive ETF is best-suited to an investor seeking broad diversification to the sector, without much focus on the underlying assets.

                                                                                           

A-REITs, on the other hand, may better suit investors who take a particular view on one of the sub-sectors, such as office, warehouses, retail etc. “If you are going to invest in REITs directly, it would probably be worth doing some research around the valuation processes for the funds,” Woodhouse adds.

However, he says both ETFs and A-REITs have advantages over unlisted REITs. “Listed property options provide a lot more transparency – I saw too many mum and dad investors get stuck in unlisted funds for five or more years after the global financial crisis,” he says. “The ability to sell and get your money out is a great advantage of these investments being listed.”

Arian Neiron, Asia-Pacific managing director at fund manager VanEck, agrees that transparency and liquidity are key benefits of all listed property securities. But he says the diversification benefit of ETFs over A-REITs is a big factor.

“Australia is the third-largest REIT market globally, based on number of REITs,” he says. “[But] the sector is relatively concentrated with just 47 holdings listed on the ASX.

“Given the nature of the local market, it is very difficult for active managers to outperform the market benchmark. In the current environment, it’s more difficult than ever to determine which A-REIT sub-sector is going to perform the best which is why it is more important than ever to be diversified.”

But he also says some ETFs are too dominated by the largest underlying A-REITs. Instead, he advocates capping the maximum weighting of any one stock at 10 per cent.

The comment is not surprising, given that is the approach taken by VanEck’s MVA fund. But it is also not unfair, given the product has outperformed the underlying index.

The S&P/ASX 200 A-REITs index returned 4.5 per cent over the past seven years and 10.7 per cent over the past three years (although lost 9.9 per cent of its value over the past 12 months). VanEck’s MVA returned 5.7 per cent over seven years and 10.9 per cent over three years (and minus-7.12 per cent over the past 12 months).

Nonetheless, Jocum says Stockspot prefers Vanguard’s VAP and recommends it to clients because it is cheaper and larger than peers and has a “long track record of returns”.

“When choosing a property ETF, an investor should consider a range of factors such as underlying sub-sector exposure, investment strategy, performance, risk size, cost and liquidity,” he adds.

But, as with any managed investments, Nan points out that these listed property funds and trusts come with some limitations.

“Investors have limited control over the properties in which they are invested as management decisions and property selection are made by the fund management team,” she says. “Additionally, listed property investments may entail management fees and other expenses that can impact overall returns.”

And while they may have some benefits, arguably listed property securities are not analogous to residential real estate.

“Listed investments help you get into the real estate market but in Australia most listed property investments are in commercial property, which may not be the market you are after,” Woodhouse says.

“Commercial property differs from residential property in many ways. Although they can make worthwhile investments, offices and warehouses aren’t particularly exciting to most people.”

There is at least one A-REIT dedicated to residential real estate (Ingenia Communities Group), but it is understood to account for just 2 per cent of the index. Other A-REITs have a mix of commercial and residential exposure, with Mirvac Group an example of a stock that is overweight residential, Neiron says.

But even if they had a much higher allocation to residential, Woodhouse says, for some investors, listed property investments would still be a poor substitute for the real thing.

Direct real estate may involve costs and administration, but the equity in it can be lent against and leveraged to purchase other assets, he points out. And, of course, there is the most obvious drawback.

“Many of my clients like the control of direct property, they can change their mind and live in the property down the line, or let the kids live in it when they are in uni,” Woodhouse says. “You cannot live in your listed property portfolio.”

 

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