For example, the correlation coefficient of direct property to Australian equities is around 0.10, and this lack of correlation should significantly reduce portfolio volatility when both asset classes are combined.
Asset Class Correlation to Australian Shares
Source: AMP Limited
The average APRA-regulated superannuation fund holds about 10% in property (approx. 3% direct and 7% unlisted). However, in trying to determine the appropriate weighting towards property, investors need to assess the following factors:
Risk profile | Investors with a low risk tolerance to short term volatility may want to avoid listed property trusts.
Investment capital | Direct property tends to have a minimum capital requirement and may not be appropriate for smaller investors.
Growth and income | Retirees looking for a stream of income may want to add more exposure to their portfolio.
Liquidity | Those who require capital in the near term may consider investing in listed property trusts instead of direct property.
Diversification | Investors need to consider whether they prefer to have exposure to various local industries (eg. retail, office or industrial) or to invest globally.
Super Risk-Adjusted Return
Overall, property provides an attractive proposition for investment portfolios due to its superior risk-adjusted return compared to other asset classes. Although the investment is usually highly geared, direct property tends to have lower volatility than equities and can provide an inflation hedge. Furthermore, returns should benefit from a regular income streams in the form of rent or distributions. Listed REITs, although more correlated to equities, have the added bonus of allowing investors to access a diversified portfolio of large commercial, retail and/or industrials without the liquidity constraints of owning direct property.
Average Asset Allocation
Source: Australian Prudential Regulation Authority (APRA)
Note: This article is intended to provide general advice only, and has been prepared without taking account of your objectives, financial situation or needs, and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. If any advice in this document relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement for that product before making any decision.