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Property in a retirement portfolio

Investing in property – what’s so great about it?

In Australia we love property. At around 6.6 trillion dollars, residential property is the largest asset class in the country, more than four times the size of the share market. Nearly two million Australians own investment property, and it has been a great source of wealth creation for decades.

Residential property is just one type of property investing

Mostly, when an individual investor buys residential property, they have a fairly concentrated portfolio. The average investor owns 1.3 properties, and they usually look to buy in the city where they live. Rental income tends to be fairly low, with the average yield in capital city properties around 3%, and close to 5% in regional areas. And that's before you take out all of the costs of ownership.

Of course the capital growth has been very strong historically and that's what most people are looking for from their property investment.

That said, the growth in dwelling approvals over recent years has been significantly above long-run averages, and while activity has begun to slow over the last year, any impact on prices as the new supply hits the market is probably yet to come.

So how do we do it at StatePlus?

Property investing at StatePlus is a bit different. Depending on the fund, we invest around 6 to 8% of our portfolios in property, with exposure to over a hundred different assets across the country in the office, retail and industrial sectors.

Income from Australian property sectors

Asset Class Yield
Residential Property - Capital Cities 3.30%
Residential Property - Regions 4.90%
Office - A Grade (Sydney/Melbourne) 5.25% – 5.5%
Industrial 6.25% – 6.88%
Retail 5.40%
Source : Savills, CoreLogic

As you can see from this table, yields on these assets tend to be higher than for residential property, and the growing rental income is a much greater proportion of the expected return.


Yields on assets in the office, industrial and retail sectors tend to be higher than for residential property.

We do expect to see capital growth though, and there are often attractive opportunities for development to unlock value.

A good example of this is at 50 Bridge Street in Sydney, where AMP is redeveloping two office buildings to create an iconic new tower at Circular Quay.

Quay Quarter Tower
Photo: AMP

The new development will have over 88,000 square metres of office space and unparalleled views of Sydney Harbour.


Capital values are much more stable than shares, and rental income is a good source of reliable cashflow.

Property plays an important role in a retirement portfolio. Capital values are much more stable than shares, and rental income is a good source of reliable cashflow.

As with everything in investments though, diversification matters, and it's important not to be too reliant on any one asset class, no matter how well it's performed in the past.


Asset class performance

Data as at 30 September 2017

  1 month
(%)
CYTD
(%)
1 year
(%)
5 year
(% pa)
10 year
(% pa)
Australian Shares
S&P/ASX 300 Accumulation
0.04 3.89 9.02 9.94 2.95
Australian Bonds
Bloomberg AusBond Composite
-0.31 2.18 -0.75 3.90 6.07
International Shares - hedged
MSCI World, excluding Australia, Hedged $A
2.38 12.76 18.11 12.85 4.83
International Shares - unhedged
MSCI World, excluding Australia, $A
3.44 7.15 15.38 17.67 5.55
Cash
Bloomberg AusBond Bank Bill
0.14 1.32 1.76 2.43 3.77
International Bonds
Barclays Capital Global Aggregate, Hedged A$
-0.43 2.76 0.53 5.10 3.31
Global High Yield
BAML Global High Yield Constrained, Hedged A$
0.88 7.76 9.90 8.83 10.29
Emerging Markets
MSCI Emerging Markets, A$
0.68 17.92 19.43 10.01 2.54
Global Property
FTSE EPRA/NAREIT Developed, Hedged A$
-0.10 4.40 1.94 10.56  
Global Infrastructure
FTSE Global Core Infrastructure 50/50, Hedged A$
-0.69 7.40 9.34 16.17  

Key indicators

  Level 1 month (%) or bps +/- 1 year (%) or bps +/- 52 week Low/High
Australian Govt 10 yr bond yield  2.84 12.4 92.9 1.91 2.98
United States Govt 10 yr bond yield  2.33 20.6 73.0 1.60 2.63
German Govt 10 yr bond yield 0.46 10.4 58.4 -0.12 0.60
Chinese Govt 10 yr bond yield 3.66 -3.5 93.4 2.63 3.73
Australian official cash rate 1.50 0.0 0.0 1.50 1.50
United States official cash rate 1.25 0.0 75.0 0.50 1.25
Euro official cash rate 0.00 0.0 0.0 0.00 0.00
Australian unemployment rate 5.6 0.0 -0.1 5.5 5.9
AUD/USD 0.78 -1.07% 2.54% 0.72 0.81
AUD/JPY 88.32 1.18% 13.98% 77.49 89.89
AUD/EUR 0.66 -0.51% -2.53% 0.66 0.73
AUD/GBP 0.58 -4.99% -0.72% 0.57 0.63
Crude Oil (US$/barrel) 56.79 7.78% 17.72% 41.61 59.42
Gold (US$/Troy Oz) 1281.50 -2.64% -2.42% 1127.80 1346.00

Major share markets

  1 month
(%)
CYTD
(%)
1 year
(%)
5 year
(% pa)
10 year
(% pa)
S&P 500 (US) 2.06 14.24 18.61 14.22 7.44
FTSE-100 (UK) -0.67 6.59 11.20 9.13 5.21
DAX (Germany) 6.41 11.74 22.05 12.20 5.02
Topix (Japan) 4.34 12.45 29.27 20.23 2.44
CSI300 (China) 0.47 18.25 20.33 13.31 -1.99

Data as at 30 September 17.
Source: Factset. Asset Class and share market indices are accumulation or total return unless otherwise stated.
A$ – performance denominated in A$, includes currency movements.
Hedged A$ – hedged performance denominated in A$, removes currency movements.



State Super Financial Services Australia Limited trading as StatePlus (ABN 86 003 742 756 | AFSL 238430) is wholly owned by FSS Trustee Corporation (ABN 11 118 202 672 and AFSL 293340) as trustee of the First State Superannuation Scheme (ABN 53 226 460 365). This information is of a general nature only and is not specific to your personal circumstances or needs. Before making any decisions based on this information you should consider its appropriateness to you. Every effort has been made to ensure the information contained in it is accurate. We strongly recommend that you consult a financial planner before taking action based on this information. Past performance is not an indicator of future performance. Neither the SAS Trustee Corporation nor the New South Wales Government take any responsibility for this information or the services offered by StatePlus, and nor do they, FSS Trustee Corporation or StatePlus guarantee the performance of any product provided by StatePlus.