One of the most contentious issues in the property industry today is the relationship between the performance of indirect and direct property. After the property downturn of 1989 many institutions reduced allocations of direct property and increased the proportion of indirect property investment.
This research study investigates the linkages between Australian property trust and commercial property returns over the period 1986 to 1996. Further, through the use of Markowitz's portfolio theory, the relative weighting assigned to direct and indirect property within an efficient investment portfolio over the same timer period was explored.
It was found that while property trusts provide enhanced liquidity and portfolio diversification benefits, they not capture a significant portion of direct property returns. This reinforces the traditional view that property trusts are more reflective of stock market performance than direct property performance.
The analysis then extended into the optimisation of investment portfolio which incorporated direct property, listed property trusts, equities and bonds. It was found that property should be highly weighted within low risk portfolios, with as much as two-thirds of a portfolio allocated towards property if attempting to maximise quarterly returns and one-third of a portfolio allocated towards property if attempting to maximise annual returns.
In a risk / return sense therefore, those institutions increasing their exposure to listed property trusts at the expense of direct property - under the assumption of gaining similar returns while achieving increased liquidity - are actually only increasing their overall exposure to equities. This has the effect of altering their asset allocation profile towards equities while decreasing their overall exposure to direct property, thereby increasing their overall risk profile.