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How to diversify your portfolio: listed Australian and global property

Lex Hall  |  03 Aug 2018Text size  Decrease  Increase  |  
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When it comes to the priorities of the Australian investor, diversification and tax effectiveness do not rate among the top three, according to the ASX Australian Investor Study 2017.

For most investors, the study notes, "the appeal of investments lies in their risk/return profiles, rather than tax concessions." And yet, one asset class that can offer diversification and tax effectiveness is listed and global property. In a single investment, listed property – be it in the form of an exchange-traded fund (ETF) or real estate investment trusts (REITs) – can allow access to major property types and locations.

listed property

Listed property can be an alternative to other income-yielding asset classes

Listed property is bought and sold on the share market much like a stock, which offers the advantage of liquidity. And as a real, tangible asset, property can be more defensive than equities as the rental income is often more predictable, notes Morningstar's Alexander Prineas, associate director, passive strategies, manager research. "Even properties that face vacancy problems may be able to be converted to an alternative use if the site is well located," he says.

When interest rates are low, listed property can be an alternative to other income-yielding asset classes such as bonds and term deposits. "Property can be tax-effective because REITs don't pay company tax," Prineas says. "As always, investors should seek their own tax advice, as it can get complicated since laws vary depending on what country the REIT is based. And ultimately, if an REIT doesn’t pay company tax, it won't offer franking credits."

Property is vulnerable to share market volatility, and to the rise of online accommodation providers, such as AirBnB, but this in turn can create opportunities. As Morningstar senior equity analyst Tony Sherlock notes, "global demand for industrial property exposure is perhaps the strongest it has ever been" as companies move from internet-affected retail sites to logistics hubs serving online retail giants such as Amazon.

Sherlock sees Goodman Group (ASX: GMG) as one local company tipped to capitalise on this trend. Following is a selection of Morningstar-rated listed and global property ideas.

Best fund ideas 

Among Morningstar's best ideas among property funds is Zurich Investments Australian Property Securities. This fund carries a Morningstar Gold rating, and its proven adherence to a successful value strategy and the ongoing insight shown by the team has ensured its place among the very best A-REIT strategies. It has a $5000 minimum investment.

Another Morningstar Gold-rated selection is Resolution Capital Global Property Securities. For analyst Sarah this fund offers "unmatched insights and a resilient, sensible process, which gives it a commanding edge over its peers." "The investment philosophy centres on four key principles: focus on the underlying real estate asset rather than an index; understanding real estate is cyclical and capital-intensive; value strong stewardship; and avoid permanent impairment of capital when investing," Fox says. "Investors will be hard pressed to find anything better in the listed global property space." The minimum investment is $30,000.

Also on the list is Silver-rated APN AREIT. According to Morningstar analyst Ross MacMillan, APN focuses on Australian property securities that can achieve sustainable income streams through ownership of quality commercial property with substantial tenant profiles and long-term leases. “It’s a solid option for those seeking an income-focused property manager with an active process,” MacMillan says. Minimum investment is $1000.

ETF access to listed property

A passive option is the Morningstar Gold-rated Vanguard Australian Property Securities Index ETF (VAP). "The top-10 holdings make up more than 85 per cent of the index. Scentre and Westfield  make up about 32 per cent, a substantial retail bet," says analyst Anshula Venkataraman. "The shop's best-in-class indexing capabilities, competitive fees, and low spreads make a compelling case for VAP."

 

More in this series

How to diversify your portfolio: 5 best global equity ideas

Aussie investors putting too many eggs in the local basket

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Lex Hall is a content editor for Morningstar Australia, based in Sydney

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© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is content editor for Morningstar Australia

© 2019 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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