Are ETFs and REITs a way for young Australians to build their stake in the property market?

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July 06 2021
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Fractional property isn’t the only low-cost route into Australia’s property market jockeying for attention from younger investors.

Are ETFs and REITs a way for young Australians to build their stake in the property market?

It’s no secret that the price of entering Australia’s housing market is at an all-time high.

The latest numbers from CoreLogic suggested that Australia’s housing market continued to rise in June 2021, bringing annual growth to 13.5 per cent for the financial year. According to CoreLogic’s head of research for Australia, Eliza Owen, this is the highest annual rate of growth seen across the Australian residential property market since April 2004.

At the same time, more and more young Australians are putting their money into exchange-traded funds.

Investment Trends and Betashares said the number of advisers using ETFs has doubled over the last decade. With 59 per cent of Australian financial advisers already using ETFs in client portfolios, they suggest that this number could rise to as high as 75 per cent by the end of 2021.

“With the wide selection of ETFs now available on the ASX, it’s easier than ever for ETFs to access a range of asset classes, sectors, regions and themes in a convenient, cost-effective way,” said BetaShares CEO Alex Vynokur.

Mr Vynokur noted that cost-effective diversification is still the number one reason advisers use ETFs.

“However, the findings support our observation that investors and advisers are becoming increasingly sophisticated in their use of ETFs to achieve more targeted portfolio construction goals.”

So, are property ETFs and their non-listed counterparts, real estate investment trusts (REITs), a way for young Australians to start building their portfolio without missing out on the lucrative conditions of today’s real estate market?

Speaking to nestegg, Dr Shane Geha, founding director at EG Group and adjunct professor of engineering at UNSW, explained that xchange-traded funds and REITS, as well as listed and unlisted property trusts, are all ways that an investor may be exposed to the property market, without being a direct property owner themselves.

Rather than save for a deposit and then embark on the usual rigamarole of building their own property portfolio, “they would simply own shares in the REIT that would itself be an investor in direct property”.

“Young investors may want to consider this type of investment because it allows them to benefit from yields and capital growth in the property sector, with a much smaller entry-level point for the investment," Dr Geha said.

What is a property ETF? And how is it different from a real estate investment trust?

In terms of their overall appeal and approach, property ETFs and real estate investment trusts operate somewhat similarly.

However, Dr Geha noted that there are advantages and disadvantages to being listed on the ASX.

He said that ETFs have the advantage of immediate liquidity but can be burdened by all the extra administrative and regulatory costs that become necessary when an entity becomes listed.

“These obviously affect the bottom line and also the ability of the REIT to act quickly under changing market conditions,” he said.

According to Dr Geha, every investment category is a matter of risk and reward, and it’s always a trade-off.

He noted that REITs have a much higher cost base than a direct investment option, and in periods of low or sluggish growth, they typically give poorer returns.

Opting for a property-focused ETF or REIT strategy over traditional property investing also means giving up a lot of the control over your investment in the real estate market.

Dr Geha said that “the individual small investor would rarely, if ever, have an influence on any investment decision taken by the REIT’s management and board”.

Still, “the main plus is that it usually requires no expertise by the small investor and also no direct or hours-of-work input, liberating them to have a full-time, income-producing job”.

“The nice thing about a direct property investment, on the other hand, or a syndicated investment, is that the investor can touch and feel the property, as well as often have a direct input into the decisions of what to buy and when to sell and exit a given market.”

When looking at investing in property-based ETFs or REITs, Dr Geha suggested that you should “look for a good sector that is growing; look for good management and a good performance that can be measured over several property cycles”.

“That will tell you how well the company has done in both boom times as well as recessionary times.”

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

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