Glaringly obvious - residential property, it's a mugs game.

You wouldn't have guessed - you can't make money in residential property.

That might be an earth shattering statement if it wasn't true. Why else do you see so little investment by corporates in residential property?

From the SMH - The Investors who loathe property

You might take it with a grain of salt considering that this comes from a research paper put out by academics at UWS.

 

Good article @Scott No Mates. This part is true:

But not for me... I am three for three on both property (making money) and shares (losing money). I do plan to invest in shares in the future but I need to be better educated before I do that.

 

I understand in a broad sense regarding shares. I invest in property because I believe that I can change the return on my investment by improving the property. With shares I do not have that ability, the outcome is controlled by others. My personal experience with property has seen a growth in value from $200,000 to $4 m over a period of 13 years. I do not believe that I could have achieved with shares.

 

Leverage plays a bit part I'd say, I like the idea of shares but I wouldn't dream of leveraging into them so any gain would only be as a percentage of my initial outlay. With property, people are a lot more comfortable in the fact they are borrowing perhaps over 90% of what they need, any gain is made on the whole then, not just the initial actual outlay. Add into that that you can (hopefully) pull out your next deposit from the equity of your first purchase and your asset base grows exponentially without ploughing more of your own money in (in theory). Maybe the returns are good enough for the big players but for Joe Public it can be a great way of building up a large asset base that's working for you.

 

Agree. I'd just change one word in your post...

Leverage plays a big part I'd say

 

The same applies to losses. Not to worry though, property prices in Australia have never gone down like that, so therefore they never will.

 

However I think a key point is that there are rarely margin calls on residential property portfolios, compared to shares.

 

There's nothing in the article suggesting that institutions prefer investment in equities, moreso about the lack of control due to government intervention in the residential sector (eg Residential Tenancies Act, FIRB etc).

The author of the UWS paper, Professor Graeme Newell, is a senior lecturer at the UWS Property faculty so he's not espousing equity investment at all, just the poor investment opportunities of residential when compared to the less regulated sectors of the property industry. He highlights the amount of competition for this sector (1.9 million in resi) vs the commercial field which alludes to a handfull of major players (REITS) & smaller setups.

 

@Scott No Mates Yeah I should have said, my comment wasn't referencing the original article, rather the flow-on convo from @Propagate and @HomePage

I do agree that it will be a long time before we see a serious increase in institutional investing in Australian RIPs.

 

@ homepage. re property prices. As long as the portfolio is cashflow positive I do not believe that the possibility of property prices going down matters. I have experienced big changes in prices/values in Christchurch as a result of an earthquake. Sure some properties went down in value, but there are also opportunities where money can be made if you did your DD. I have bought 2 more properties post earthquake that are cashflow positive.

 

Agreed. I'm just saying there's two sides to the leverage coin - it amplifies both gains and losses. Just because we haven't experienced the loss side to any great extent with property in Australia doesn't mean it couldn't happen with circumstances beyond Australia's reasonable control. Being cash flow positive and having low LVRs goes a long way towards mitigating such a downside risk. The risk may be very low, but if it eventuated the consequences could be catastrophic for property investors living close to the serviceability edge.

 

Can you imagine a hedge fund manager having to worry about late rental payments and overgrown shrubs on behalf of his investors.

 

I agree. Anyone living close to the serviceability edge would be wise to put some backup strategies in place. I have calculated but at a guess my cash reserves would see me through a couple of years of a severe downturn, even with my properties vacant.

 

They don’t - leverage of around 60% & propertymanagers look after arrears with facilities managers on the maintenance -all part of the tenant paid outgoings