Alternative ways to invest in the property market

Investing in property is one of the best-known and most reliable ways to create wealth but, for many of us, direct property investment with its typical 30-year mortgage is not only daunting but simply unaffordable.

Luckily there are plenty of other ways to invest in the property market that will give you a slice of the property pie without a massive financial outlay.

Shares

Ashley Glover, head of sales trading APAC & Canada at CMC Markets, says one way is to buy direct shares in companies within or servicing the real estate sector.

You can invest as little or as much capital as you want in shares via an online trading platform like that offered by CMC Markets and, unlike a house or apartment, shares are a liquid asset, meaning you can buy and sell with the click of a mouse.

There are a range of companies directly related to the residential and commercial property markets that are listed on the ASX and can provide exposure to this sector, says Glover, such as property listings portals, manufacturers of construction materials and property developers.

Real Estate Investment Funds (REITs)

For a more diversified property portfolio, Glover says REITs – Real Estate Investment Funds – typically offer exposure to a portfolio of commercial properties such as offices and apartment buildings, shopping centres and hotels.

“They tend not to be residential in nature,” says James Gerrard, founder of financialadvisor.com.au.

Popular with retirees and those soon to retire wanting to diversify their investments with a hands-off instrument, REITs provide an opportunity to invest in quality properties with strong tenants and favourable lease terms, says Gerrard.

“One of the main advantages of REITs is that you’re one of many people who are invested in these companies, so where you might not be able to get your own commercial exposure, economies of scale allow you to do that with REITs with just a $500 investment.”

REITs are a share market-based investment, so investors should expect some volatility, but many funds also pay out much of their taxable income in dividends, providing cashflow for investors.

Exchange traded funds (ETFs)

Exchange traded funds (ETFs) are another stock market-based option. ETFs work by tracking the yield and return of indexes, so by buying an ETF that tracks the property sector you’re effectively buying a small holding in each of the property-related companies in that fund.

“Like your REITs, you can bundle multiple holdings together and have a tracking fund which enables you to diversify your risk if you’re looking for a foray into commercial and industrial property,” says Glover.

Gerrard says ETFs offer a low entry cost and are very low maintenance compared to direct property.

Fractional investing

For those who want to stick with residential real estate but can’t afford to buy alone, fractional investing is a relatively new investment tool.

“It’s a way for investors to come together and effectively crowdfund the purchase of a property through a company like BrickX,” says Gerrard. “Instead of spending $750,000, you can spend $7500 and your ownership is proportionate to what you invest.”

Gerrard says fractional investing holds particular appeal to younger investors looking to replicate property ownership by claiming a share in a Sydney or Melbourne inner-city apartment with a much smaller outlay.

There are transaction costs going in and out and an overlay of ongoing management fees, with rental yields of around 2.5 per cent after costs. You will then share in any capital growth of the property, with the option of selling your “bricks” in the secondary market.

Managing director at homeloanexperts.com.au Otto Dargan says it’s important to do your due diligence on any of these alternate property investment options.

“They can be a good way to get exposure to real estate, but if you want to gear your investment, or if you’re looking to negative gear, you can’t use these instruments,” he says.

Dargan also reminds investors not to underestimate the risks of specialised investments and to seek expert advice wherever possible.

The information presented in this article is general in nature and should not be considered personal or financial advice. Seek independent advice and consider the relevant Terms and Conditions at cmcmarkets.com.au when deciding whether to invest in CMC Markets products. CMC Markets Asia Pacific Pty Ltd (ABN 11 100058 213 AFSL No. 238054