The modern alternative to buying a house

By John Beveridge - June 12, 2023

Modern alternative buying house investment boomer generations property trusts REIT A-REIT ETF deposit loans

Buying somewhere to live is unquestionably much tougher than it used to be.

Which has led to a while lot of unproductive finger-pointing and generational conflict, considering the much longer times needed to save a deposit and the cost of servicing much larger home loans.

However, one aspect that is often ignored is that higher housing costs for both renting and buying require post-Boomer generations to adopt a very modified investment plan to the one their parents or grandparents used to build up wealth.

Indeed, higher housing costs make having a good investment plan much more important, not less.

Younger generations can still buy property

So, what are some of the alternatives to the traditional “buy a house and pay it off” pattern?

Well, perhaps surprisingly, modern investment products have made developing and sticking to an investment plan much easier to achieve and can involve a wide range of investment classes that simply were not available to previous generations.

It is much easier to start small and build wealth over time too, with the ability to use debt to boost or “leverage” the size of your investment – also a great investment tool that equates very nicely to the traditional mortgage aspect of buying a house.

Greater flexibility and lower costs

Using that sort of manageable leverage and adopting regular “mortgage” style payments can very closely mimic the traditional slow and steady forced savings road to property ownership, although this strategy ensures much more diversification and the flexibility to sell off part or all of the investment at any time should another opportunity come along – perhaps even buying an actual place to live.

Of course, being an investment there are also negative gearing tax benefits when using debt and the opportunity to bring forward deductions by paying the next year’s interest cost in full before the end of the financial year.

For the sake of this story, we will focus just on the listed property alternatives although there are obviously a range of other asset classes such as shares, international shares, bonds and infrastructure to name just a few that should also feature in a balanced portfolio that is diversified within and between asset classes.

Property is a great asset class

The first thing to note about property is that it is a desirable asset class that has performed very strongly – particularly in Australia.

It is also not highly correlated with other asset classes, which makes it highly desirable and also has strong yields which exceed cash returns.

The main alternative ways of getting exposure to property is through shares in companies that focus on property, through listed property trusts which are often called A-REITs (Australian Real Estate Investment Trusts or property trusts) and exchange traded funds that are made up of a group of A-REITs, usually selected in order of size as measured by market capitalisation.

Some of the benefits of this alternative approach is that the upfront costs are much smaller, the liquidity is much better and the diversification is better too.

An extra bonus is that A-REITs and the ETFs that cover them are fairly cheap at the moment, due to the negativity surrounding rising interest rates.

Using ETFs or choosing your own A-REITs

I’m personally a fan of the ETF approach – partly because of the greater diversification but also because I don’t want to get bogged down researching and keeping up to date with around 50 Australian listed A-REITS and property companies, some of which are concentrated on niche areas of property.

However, there is definitely a place for choosing your own A-REIT portfolio and particularly avoiding the concentration on the really dominant big groups such as Goodman Group (ASX: GMG), Scentre Group (ASX: SCG), Stockland (ASX: SGP), Mirvac Group (ASX: MGR), GPT Group (ASX: GPT) and Dexus (ASX: DXS) that will feature heavily in most ETFs of the sector.

In general terms, concentrating towards the bigger property groups produces a more mature flow of distributions while some of the smaller, more niche REITs might provide more benefits from development or growth.

Active or passive?

Some of the most popular property ETF’s include Vanguard’s Australian Property Securities Index ETF (ASX: VAP), the SPDR ASX 200 Listed Property Fund (ASX: SLF) and the VanEck Australian Property ETF (ASX: MVA).

There is also an actively managed ETF called the BetaShares Martin Currie Real Income Fund (ASX: RINC) which can also invest in infrastructure and utilities to generate income.

The advantage of taking a more active approach and trying to pick some winners yourself is that you can impose your view on which property sectors might be performing better such as office, shopping centres, industrial, warehouse, recreational, car parking or any one of the many property sectors available.

Of course, beating the index is always hard, so using an ETF such as VAP or SLF can avoid a potential mistake and reduce risk.

There are also some ways to get exposure to overseas property, with plenty of direct shares and also some locally listed global property ETFs.

One thing to consider when assembling a new style housing portfolio is that even though property has performed well historically, it is still only one of many asset classes.

When looking at the asset allocation of most professional investors, property usually makes up a maximum of 10% of a portfolio and often much less.

So, while the idea of replacing the old school buy and hold property investment with a listed version is a good start, it is a good way to jump start an even more diversified portfolio.