Less volatile unlisted property investments have outperformed REITS over last 25 years: PFA report

Unlisted property trusts have delivered stronger and more stable returns than REITs over the last 25 years, according to a new report published by the Property Funds Association of Australian (PFA), the peak body representing the unlisted wholesale and retail property funds sector.

The strong income performance and low volatility are factors which should encourage investors to add direct property to their portfolios, the report argues. 

It also explains why unlisted property investments have exceeded those made in the listed space over the past 12 months, with the PFA estimated the cumulative value of the direct property sector to be around $55 billion.

The report, compiled by Atchison Consultants, compares the returns generated by the Property Council of Australia/IPD Composite index (covering 1,629 direct property investments) with those generated by the benchmark S&P ASX A-REIT 200 Accumulation Index (commonly called the A-REIT Index).

Apart from the three years to March 2012, direct property returns has exceeded listed property returns over all periods over the last 25 years. 

In addition, the unlisted property sector has been a more stable investment vehicle than listed property, which boomed before the GFC before crashing soon after.

According to the report, throughout the GFC, volatility of returns had been at extreme highs in the listed property market peaking at an annualised 34% in December 2009.

And while volatility of returns has stabilised in the REITs sector to around 17% as confidence in the listed property market returns, annual volatility of direct property returns have been constantly below 5%.

The report notes that direct property returned positive annualised performance over all periods to March 2012.

“By comparison, listed property experienced a negative return of 13.3% per annum over five years to March 31 2012, mainly attributable to the large fall in the listed property during 2007 to 2009 in the GFC.

“All listed equities fell significantly during this time. The fall in listed property was exacerbated by substantial increase in debt finance used by A-REITs in expanding property portfolios.

“Subsequently as the GFC emerged the banks required reduced levels of debt. Investments in riskier activities such as property development and the uncertainty and poor performance associated with the increased exposure to offshore property at high gearing levels also contributed to the negative performance,” says the report.

PFA president Robert Olde says investors should take note of the low volatility figures for direct property investments revealed in the report.

“They are low compared to those of both equities and listed property vehicles such as A-REITs. In our view this is another signal of the opportunities offered by direct wholesale and retail property funds, trusts and syndicates.

“The findings in this report are a strong validation for the inclusion of direct property in a diversified portfolio – and even more so when times are tough and turbulent.

“Since the GFC, for example, direct property has continued to demonstrate the kind of resilience and positive total returns that other asset classes simply have not. And judging from inflows in the past 12 months, investors are beginning to understand the hard facts.”

PFA vice president Jason Huljich says the research constitutes a valuable update for investors seeking to strengthen their portfolios in the face of a continuing uncertainty.