Understanding Asset Classes
Property has long been a favoured investment asset class for Australians generally as well as within a SMSF structure. However, the nature of the underlying investment varies between the two investor types, with SMSFs holding a higher proportion of non-residential property than residential and retail investors tending to invest in residential property outside a SMSF. This does not say that SMSFs do not or cannot hold residential property as an investment class.
Investments in property can be subject to ‘property cycles’, which are driven by expectations around property values. If there is a predominate view that property values will rise; prices tend to follow. As the term suggests, cycles do move from a low, through a peak and descend, so the reverse applies when the view on property values switches; prices can fall.
Property cycles may vary in terms of the nature of the underlying property type and the drivers and duration of the cycle may be different for each property type. A strong economy can drive the demand to commercial property, such as offices and warehouses, while a growing population can drive demand for residential.
To achieve diversification across the property component of an investment portfolio, the SMSF should hold a range of property types to take advantage of different cycles.
If the preference is to hold the properties directly, it may be difficult to achieve a broad enough spread of property types, as the cost associated with buying one, let alone a number of properties could be prohibitive.