Australian property investments underperform compared to super funds
The average super fund outperformed property between 1990 and 2020.
At last, some long-term numbers have been run on the great Australian dream of becoming a landlord and as I have long suspected, it is not the gilded path to riches that so many people seem to think it is.
Indeed, the very detailed white paper by Australia’s biggest digital home settlements firm Property Exchange Australia (PEXA) and researchers at fund management group Long View found that the average Australian property investor made a 6.3% a year after tax return between 1990 and 2020.
To put that number into perspective, the average super fund – an investment which evokes absolutely no excitement or engagement for most Australians – returned an annual 7.4% over the same period.
Now add to that equation the many hassles involved in being a landlord – the concentration risk of one big, lumpy investment, the worry that the tenant could trash the place and disappear, the sheer hassle and expense of arranging repairs and dealing with cash flow problems between tenants, the complex tax paperwork – and the attraction of a fairly passive and easy investment like a balanced super fund becomes much more acute.
Australians still obsessed with property
Still, there must be something in the water that propels this Australian property obsession that continually drives new investors with stars in their eyes to undertake the high touch/ low return path that this research points out so clearly.
That is not to say that property investors are all mugs – indeed, this research showed that some flippers and renovators made excellent returns on property in a short time – but just to point out that there might be a better way to make money than the classic negatively geared investment property.
With many excellent diversified real estate investment trusts (REITs) trading on the share market, it is certainly possible for those with a love of property to invest there without any of the worries of chasing rent and concerns about a lack of diversification.
REITS are the administration-lite property investment
Naturally, it would be better to add more diversification through an Australian or foreign index ETF with property as a smaller portion of the investment – like the super balanced fund approach – but for sheer ease of use the REIT has many advantages over direct property.
Apart from diversification and professional management, REITs can also provide exposure to other property classes such as office, industrial, retail and even holiday accommodation without raising a sweat or meeting a single real estate agent.
Plus, you can quickly sell a portion of the investment at any time – the equivalent of selling off the back bedroom in a rental property.
Renting is really tough too
The other side of the rental coin – the renters themselves – is also a place of great pain according to this research and not just because of the insane competition that the current low vacancy rates are showing.
“Australia is already one of the hardest places in the developed world to be a renter,” PEXA chief executive officer Glenn King said.
“The biggest problem is insecurity – long-term leases are rare and renters live with constant uncertainty about whether they will have to move.”
“Maintenance is often a headache and there are few incentives for the landlord to improve properties, for example through energy retrofitting.”
Even the RBA is concerned
Even the Reserve Bank of Australia agrees that the rental housing situation across the nation is dire, with rents rising fast, ultra-low vacancy rates and sluggish home construction and investment.
Federal Government Housing Minister Julie Collins is hoping co-operation between levels of government and a national housing accord to boost social and affordable housing will help but even the most optimistic would concede that will take time.
As for why the stock of rental homes and apartments is static or falling, the simple answer could be that “mum and pop” landlords are simply cashing in their chips and moving on.
As the PEXA/Long View report concluded the leading reason for property investors to sell up was because: “It doesn’t work the way they had thought it would.’’
Additionally, with net rental yields still running well behind interest costs, a big component of the return in being a landlord is through capital growth and selling is the main way of accessing that gain.