What's ahead for the best-performing asset class in 2018-19
The arguments for considering a greater allocation to listed property are strong.
Australian investors love property, and it accounts for about two-thirds of household wealth.
But that is mostly residential property, and the current market correction is a reminder that it's safer to spread your bets across different property types.
With the property bubble bursting, Australians would be wise to consider investing in listed property, including commercial property, and diversifying their exposures beyond houses and beyond Australian shores.
One effective way to do this is through real estate investment trusts (REITs).
REITs are landlords.
They own residential, commercial, retail, industrial and healthcare properties and have strong defensive qualities, as they achieve a high proportion of their returns from rent, which provides a regular income stream to investors compared with other growth assets.
While dividends from companies can be volatile and can stop at any time, REITs receive rental income during the good and bad times.
Rents are mostly linked to inflation, which is important as it maintains the value of the income stream over time.
Highlighting the relatively high income potential of A-REITs, the dividend yield of S&P/ASX 200 A-REIT was around 4.4%pa as at August 31, according to S&P Dow Jones Indices.
This is much higher than average interest rates of 1.65% on 12-month and 1.7% on three-year bank term deposits published in July.
So REITs deliver good income - and potential capital growth - at a time when investors' portfolios are being starved of income given ultra-low interest rates.
Australia's 10-year bond yield has fallen below 1% and could keep falling, which has dragged down term deposit rates.
The Reserve Bank cut official interest rates in June and July and we could see another official rate cut by the year's end given the Australian economy is struggling under the weight of high household debt and a slowing property market, as well as a slowing global economy.
So the news is not good for income investors.
This is enhancing the appeal of REITs - and they have performed well. A-REITs were the best-performing asset classes in 2018-19, as the chart highlights.
Over the year to August 31, 2019, the S&P/ASX 200 A-REIT Index gained 19.4% compared with 9% for the S&P/ASX 200. Global property also performed well, returning 10%.
There are no guarantees this will be repeated over 2019-20, but if interest rates and bond yields keep falling, REIT values could be supported as they historically move in the opposite direction to interest rates.
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