##{"id":59048,"date":"2011-10-26T10:26:16","date_gmt":"2011-10-25T23:26:16","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/10\/26\/smsfundamentals-returns-on-asset-classes-past-and-future\/"},"modified":"2011-10-26T10:26:16","modified_gmt":"2011-10-25T23:26:16","slug":"smsfundamentals-returns-on-asset-classes-past-and-future","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/10\/26\/smsfundamentals-returns-on-asset-classes-past-and-future\/","title":{"rendered":"SMSFundamentals: Returns On Asset Classes, Past And Future"},"content":{"rendered":"

\n\t(This story was originally published on 13 October, 2011. It has now been re-published to make it available to non-paying members at FNArena<\/span> and to readers elsewhere).<\/em><\/p>\n

\n\tSMSFundamentals<\/span> is an ongoing feature series dedicated to providing SMSFs<\/span> (smurfs<\/span>) with valuable news, investment ideas and services, in line with SMSF<\/span> requirements and obligations.<\/strong><\/p>\n

\n\tFor an introduction and story archive please visit FNArena's<\/span> SMSFundamentals<\/span><\/a> section on the website.<\/strong><\/p>\n

\n\t
\n\tBy Greg Peel<\/p>\n

\n\tProperty analysts and property fund managers always like to pull out a particular chart which they use as their argument for superior returns available to the longer term investor in the property market. In simple terms, it compares the past ten-year or more return on property, stocks, fixed interest and cash. The reason property people like this chart is because it usually shows property investment as the winner.<\/p>\n

\n\tThe team at ANZ<\/span> Research has also prepared such a chart, setting its base at the beginning of 1987. The chart compares returns on commercial property, residential property, the ASX<\/span> 200 (accumulated for dividends), government bonds and term deposits. The chart appears shortly in this article but I won't unveil it yet, because ANZ<\/span> Research has only produced it as a means of comparison. Not comparison between asset classes in this case, but comparison between what is for the most part a misleading chart and the chart investors really should be looking at if they are going to arrive at a realistic conclusion about the past performance of different asset classes.<\/p>\n

\n\tOne of the problems with the first chart is that it lumps in both owner-occupied and investment property under the same “residential property” banner. Yet as we well know, there are significantly different investment implications for each from the perspective of loan cost, tax and tax deductions. Realistically, owner-occupied housing (OOH) and residential investment property should be treated as two different asset classes for comparison purposes.<\/p>\n

\n\tIndeed, as soon as we open up the Pandora's Box of costs and taxes, we realise<\/span> that every asset class is very different, thus rendering an “apples to apples” chart more of a fruit salad. On that basis, ANZ<\/span> Research decided to undertake a far more comprehensive exercise and thus produce a far more “apples to apples” set of results.<\/p>\n

\n\tThe initial, simple chart ignores debt, transaction or maintenance costs or taxes. Nor does it assume cashflows<\/span> from any asset are reinvested. The problem here is that you can't reinvest rent from an investment property by buying a little bit more of the same property, whereas you can reinvest dividends from stocks, for example, by buying a bit more of the stock. So instead, ANZ<\/span> takes any cashflows<\/span> and sticks them in an accruing term deposit. Hence “total return” comparisons can be more realistic.<\/p>\n

\n\tFor its more complex chart, ANZ<\/span> maintains the same reinvestment model but now takes account of that which the simple chart does not. The analysts have accounted for maintenance costs, stamp duty and agent's fees as realistically as possible. They have included tax effects using a marginal income tax rate of 45%, and have included capital gains tax.<\/p>\n

\n\tWhereas such changes render OOH and residential investment property now quite different, residential investment property and commercial investment property are otherwise equivalent with the exception of maintenance costs. Simple chart assessments of commercial property always assume a level of maintenance costs whereas assessments of residential do not.<\/p>\n

\n\tANZ<\/span> has assumed a 50% level of gearing for all assets other than government bonds and term deposits. Interest costs are then taken into account and the deductability<\/span> of interest costs likewise, thus to allow for negative gearing. Cashflows<\/span> from property and equity investments are first used in the model to pay off debt before they are placed into the aforementioned term deposit. The analysts have not made any allowance for enhanced property value from any renovations or improvements. That's getting just too esoteric.<\/p>\n

\n\tSo thus I can now unveil two charts for easy comparison. The first is ANZ's<\/span> equivalent of the simple chart many of you would have seen before in some form. The second is ANZ's<\/span> more complex and thus more realistic chart, taken all noted above into consideration:<\/p>\n

\n\t $\"\"$ <\/p>\n