And for real estate investment trusts (REITs) or listed property, their Prince Harry moment came during the GFC.
It was then that their excessive levels of gearing, ventures into property development and paying high distributions funded by debt, quickly came back to haunt them.
Of course when your sector gearing trebles from 15% in the more conservative 1990’s to 45% in the debt swilling 2000’s, any trouble would have meant little room for error.
And this was the main reason some REITs took a 50% dive during the crisis.
Right now REITs are receiving attention again, mainly due to the fact they’re going upwards and providing yield for investors.
Across the year ending July 2012, the S&P ASX 200 Listed Property Index was up 25.56%.
And while over five years it still lags with a -10.42% return, over the longer term of 20 years a $10,000 investment would have still grown to $38,394.
Not as impressive as Australian shares, or Australian and International Bonds over the same 20 year period, but even with the fallout of the GFC, Australian REITS still outperformed cash with a 7% pa return compared to 5.7%.
Thankfully now they appear to be back to their core business of being landlords and collecting rents, this makes them more predictable.
Importantly REIT leases are inflation linked, which will continue to provide steady in low growth times.
The other important factor is the reduction in gearing levels across the sector, that peak of 45% has been lowered to 28% with more diversified funding structures.
While still being considered a risk asset, their volatility has reduced and they’re becoming more defensive.
The current dividends of around 6% appear sustainable, unlike the bad (or stupid) old days leading up to 2007-08 where all earnings were being paid to investors!
If you’re looking for liquid exposure to the real estate market REITs are again looking like the place to start.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. Need help with your financial your financial future, we think we’re the best financial adviser in Australia.
