In the article the discussion compares the risk return of property and shares, more specifically domestic real estate as an investment option versus the All Ordinaries Index.
The article references ‘the property index’ which, it states, compares returns on property as capital growth plus rental yields, less ongoing holding expenses and amortised buying and selling costs; ‘a realistic estimate of costs of 2.5%.’
It is far from clear if these estimates allow for the ongoing maintenance expenses of running domestic real estate. As a point of consideration, in the 2012 financial year Bunning’s Warehouse had sales revenues of $7.2bn. I think it fair to assume a large percentage of this was spent on the upkeep of domestic properties. Also, this figure does not account for money spent in Mitre 10 or in the stores of other competitors, nor the human cost of the time involved; it is purely the raw materials. It would be interesting to understand how the researchers derived 2.5% as a reasonable estimate of costs.
Further to this, it is not evident if the estimated rental yields allow for the taxation of rental income The All Ords’ measure includes dividends but there is no mention of what, if any, consideration was given to franking credits.
When comparing asset classes, creating an ‘apples for apples’ scenario is ideal, but sadly is not always possible. The concern I have with the comparison of domestic real estate as an investment vehicle versus an index like the All Ord’s is the reliability and depth of the data available. For example, the actual costs of domestic real estate would need to include management fees and charges, maintenance and repair costs, rates and other taxes (including that on rental income), insurance, periods of no occupancy and TIME.
My undergrad degree was in Modern History. In first year we were taught the basics of analysing any piece of primary data; when was it produced, who produced, why was it produced and who was the intended audience. When you consider these aspects you start to accept, or question, information in a different light.
It is my belief the only fair comparison of property to a listed index is to consider listed property trusts. The vigorous requirements of an ASX listing means there is a detailed accounting of every dollar earned, every dollar spent (and where) plus additional factual data such as periods of no tenancy for properties.
It is not my contention that the data is wrong (although it may be); it is not my contention that the data is incomplete (although it is possible); it is so important to have genuine transparency with regard to the research data used to promote a particular view point (or even vested interest).
A letter relating to the points made here was sent to RP Data but is yet to yield a response.
By Gareth Daniels, Financial Planner
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
