Investing in property

Investing in property is part of the Australian dream. We explore some of the options available to investors in this sector.

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The property sector has long been popular for investors looking to diversify their portfolios and generate long-term wealth. 

Whether residential or commercial real estate, investing in bricks-and-mortar assets can provide many benefits, from steady rental income to capital appreciation. However, it's important to understand the different types of physical property available and the pros and cons of investing in the sector.

What are the different types of physical property you can buy?

The first step to investing in property is to identify the type of asset that best suits your investment goals and budget. There are several different types of physical property available, including:

  • Residential: This includes properties such as apartments, townhouses, and houses intended for residential use. Residential property can be a good choice for investors looking for steady rental income and potential capital gains over the long term.
  • Commercial: Commercial property refers to offices, retail spaces, and warehouses intended for commercial use. Investing in commercial property can be more complex than residential property but can offer higher rental yields and longer lease terms.
  • Industrial: Industrial property includes factories, manufacturing plants, and storage facilities. These types of properties can be a good choice for investors looking for steady rental income and potential capital gains over the long term.
  • Agricultural: Agricultural property includes farms, ranches, and vineyards. These properties can be a good choice for investors looking for long-term capital appreciation and potential income from agricultural operations.

Benefits of buying bricks-and-mortar real estate

One of the main benefits of investing in physical property is the potential for steady rental income. This can provide a reliable and consistent cash flow over the long term. In addition to rental income, investing in property can also offer potential capital appreciation. Over time, property value can increase, allowing investors to realise a profit when they sell.

Another advantage of investing in property is the ability to leverage your investment. With a mortgage, investors can use borrowed funds to purchase a property, allowing them to control a more significant asset with smaller upfront capital. This is most common with home loans. Of course, you can borrow funds to invest in shares or stocks, but doing so is less common. 

And the drawbacks

Investing in property comes with its own set of risks and challenges. 

One of the main disadvantages is the illiquidity of the asset. Unlike stocks and other securities, selling a property quickly, if needed, can be difficult. Significant transaction costs can also be involved in the purchase or sale of a property, including professional fees and stamp duty. 

Property investment also requires substantial upfront capital, which may be a barrier for some investors. In addition, property requires ongoing maintenance and management, which can be time-consuming and costly.

Another risk associated with property investment is volatility — the potential for fluctuations in real estate values. Like all assets, property value can rise and fall depending on market conditions and other factors. 

And not all sections of the property market perform the same way at the same time. Residential property is in tight supply in Australia right now. Meanwhile, experts predict a decline in the amount of office space leased over the next few years. 

How to invest in property on the ASX stock market

For investors interested in the property but don't want to invest in physical real estate, several options are available on the stock market. 

Investing in ASX property shares offers exposure to the property sector without the challenges of owning and managing physical assets. 

It can also expose investors to the performance of different property types. Warehouse or retail real estate, for example, may be difficult for individual investors to gain direct exposure to. 

There are several different types of property investments available on the ASX. Each allows investors to invest in real estate without having to purchase, manage or finance properties themselves. 

Real estate investment trusts (REITs)

These trusts own and manage income-producing properties, such as office buildings, apartment complexes, shopping centres, warehouses, and hotels. Investors can purchase shares in a REIT, which gives them ownership of a diversified portfolio of properties and the right to a portion of the income generated by the properties owned by the REIT.

A couple of dozen REITs are listed on the ASX, covering various sectors including commercial, retail, industrial, and residential real estate. Scentre Group (ASX: SCG) is one of the largest REITs on the ASX and owns and operates Westfield-branded shopping centres in Australia and New Zealand. Dexus (ASX: DXS) has office, industrial, and retail properties across Australia.

Property managers and developers 

These companies are involved in the development and management of real estate. 

Property developers identify and acquire land or properties with the potential for development. They then oversee the process, securing financing and obtaining necessary permits and approvals, designing and constructing buildings, and marketing and selling or leasing the finished properties.

Property managers oversee the day-to-day operation of properties. This includes finding and screening tenants, collecting rent, maintaining and repairing the property, and handling legal and regulatory issues. Property managers work on behalf of owners to ensure that properties are profitable, well-maintained, and attractive to tenants or buyers. 

Several property managers and developers are listed on the ASX, including Goodman Group Ltd (ASX: GMG) and Mirvac Group Ltd (ASX: MGR). Goodman specialises in owning, developing and managing industrial property and business space. Mirvac focuses on developing residential, commercial, and retail properties and managing and operating investment properties.

Property exchange-traded funds (ETFs)

These funds are traded on the ASX and are designed to track the performance of a specific index or a basket of real estate securities such as REITs and other property-related companies. 

ETFs can track various indices, such as the S&P/ASX 300 A-REIT Index, which measures the performance of the Australian real estate investment trust (A-REIT) sector. 

Advantages of investing in ASX property stocks 

  • Diversification: Investing in property stocks exposes investors to a range of real estate assets, such as residential, commercial, industrial and retail properties. This diversification can reduce risk and volatility.
  • Income generation: Property stocks often pay regular dividends to shareholders, which can provide a stable source of income. This can be particularly attractive to investors seeking steady income.
  • Liquidity: Property stocks can be bought and sold quickly, giving investors liquidity and flexibility to adjust their investment portfolios as needed.
  • Professional management: Property stocks listed on the ASX are often managed by experienced and professional property managers with the expertise to identify and manage real estate assets. This can be particularly beneficial for investors who do not have the time or expertise to manage properties themselves.
  • Potential for capital appreciation: Property stocks can appreciate over time, providing capital gains to investors. This can be particularly attractive to investors seeking long-term capital growth.

And the disadvantages

  • Market volatility: The value of property stocks can be affected by market volatility, which economic factors, changes in interest rates, and shifts in investor sentiment can drive.
  • Exposure to sector-specific risks: Property stocks are typically more exposed to sector-specific risks, such as market conditions, interest rate changes, and regulatory changes.
  • Inherent risks of property investing: Property investing carries inherent risks, such as the potential for market downturns, property damage, and fluctuations in rental income.
  • Lack of control: When investing in property stocks, investors do not have direct control over managing the underlying properties or assets. This can limit the ability of investors to influence the investment outcomes.

Should you invest in ASX property stocks?

Whether you should invest in property stocks will depend on your financial goals, time horizon, and risk tolerance. 

Different classes of property can perform differently over time. For example, the industrial property market was relatively resilient despite the COVID-19 pandemic, with demand remaining strong due to an increase in e-commerce and a surge in demand for warehousing and logistics facilities. 

On the other hand, the market for office buildings faced significant challenges as many businesses adopted remote work policies. 

Property shares offer investors the opportunity for exposure to different segments of the property market without buying a property directly. REITs can provide exposure to a diversified portfolio of properties across various sectors, such as office, retail, residential, and industrial.

This can provide investors with a level of diversification that may not be possible with direct real estate investments. Property stocks are also more liquid than direct property investments and can be acquired with relatively little capital. 

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Motley Fool contributor Katherine O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Goodman Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.