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Russell Investment Performance Report to December 2004

Listed property tops the list of best performing investments for 2004 with returns between 10% and 12.3%, higher than shares and residential investment property.

In this article we look at the relative performance of various investment opportunities during 2004.

Last month ASX released the Russell Investment Performance Report (PDF 67KB) for 2004. The report measures pre and post tax returns on Australian shares, listed property trusts, residential investment property, fixed interest and cash. In doing this it takes account of dividend yields, dividend imputation and brokerage for Australian equities. For residential property - median property prices, average net rentals, vacancy rates, maintenance, repairs and stamp duty are included.  Returns differ from year to year. Last year Listed Property Trusts (LPTS) were the top performer over the 10 year period 1995-2004.

The report revealed that listed property provided after-tax returns averaging between 12.3% and 10.0% per annum (depending on income bracket) and Australian shares returned between 11.6% and 9.2% per annum. Residential investment property returned between 10.6% and 8.4% per annum.

In the report released last year by contrast (covering 1994 – 2003), residential investment property outperformed all other examined investments. This followed a well documented upswing in the housing market. Likewise, listed investments experienced a strong run from 1995 – 2000 when the All Ordinaries Index rose by 66.84% and again from 2003 to 2005 (36.2% increase).  In fact an investment in 1994 for 10 years until 2003 was the only time in the last 20 years when residential investment property outperformed listed investments.  Shares and other listed investments have outperformed every other year. 

Listed Property Trusts (LPTs)

LPTs allow investors to purchase an interest in a diversified and professionally managed portfolio of real estate.  Investors gain exposure to both the value of the real estate the trust owns, and regular rental income generated from the properties.  The fund manager selects the investment properties and is responsible for all maintenance, administration, rentals, and improvements.  For anyone that has experienced problems with tenants, leaving the management to someone else is a major attraction.

Most property trusts include properties across a diversity of geographic regions, lease lengths, and tenant types so are less risky than a single property. This diversity allows trusts to pay regular income, with most yielding between 6% and 10% per annum.

Because LPTs invest in relatively stable commercial real estate and investors receive regular rental payments, the price fluctuations (volatility) of property trusts tend to be lower than for shares. Historically, LPTs are about 40% less volatile than shares.

LPTs are one of the largest sectors on ASX and currently make up 12% of the world's listed real estate assets.

The types of trusts currently available include: 

  • Industrial - investment in warehouses, factories, and industrial parks
  • Office - investment in large to medium scale office buildings and parks, generally in and around major cities
  • Hotel/Leisure - investment in accommodation assets, generally 4 - 5 star properties in major cities or leisure assets such as theme parks
  • Retail - investment in shopping centres, malls, cinemas, and other shopping-related real estate
  • Diversified - investment in a mixture of Industrial, Office, Hotel, and Retail

Diversification the best bet

While listed property was the best performer over the last 10 years ending 2004, over the last 20 years it’s a different picture.

Over 20 years, depending on marginal tax brackets, Australian shares produced the best returns ranging between 13.5% and 11.6% per annum followed by residential investment property with returns between 11.7% and 10.2% per annum.  Listed property averaged 11.5% and 9.5% per annum, well in excess of the average rate of inflation of 4%.

Fixed interest enjoyed more modest performance, returning between 8.5% and 5.4% per annum depending on the marginal tax rate applied. Cash returned 6% on the lowest marginal tax rate and 3.7% on the highest marginal tax rate including the Medicare levy.

On the results of the 2004 survey Colin Scully, Deputy Chief Executive Officer said: “This report is a useful tool for all participants in Australian capital markets.  We understand it to be the only one of its kind and we are pleased to partner with an organisation such as the Russell Group, to make this available for market participants.  Of course, all markets are prone to volatility, but this report illustrates that diversification and perseverance are necessary for riding out the inevitable rises and falls of all markets.”

Key highlights – Investment returns for 10 years to December 2005:
For the top marginal tax rate including the Medicare levy
Australian Shares – 9.2% pa
Listed Property – 10.0% pa
Residential Investment property – 8.4% pa
Fixed interest 4.4% pa

For the lowest marginal tax rate:
Australian Shares – 11.6% pa
Listed Property – 12.3% pa
Residential Investment property – 10.6% pa
Fixed interest 6.7% pa

The ASX Investment Performance Report was funded by the ASX Research Committee, which undertakes research for the benefit of the securities industry.

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