Share

October 22, 2015

By Vince De Zoysa, Residential Research Analyst for JLL, based in Sydney, Australia.

In the Australian film “The Castle”, the archetype of the Australian mum and dad investor, Darryl and Sal Kerrigan, fight a legal battle to hold onto their piece of the Australian dream; a quarter-acre block of land along with a barbeque, a dog and two kids.

That “dream” may no longer represent the majority. Nonetheless, Australians at all income levels are involved in real estate, especially our high net worth individuals (HNWI)[1].

According to the Capgemini and RBC Asia Pacific Wealth Report 2015, Australia’s high net worth individuals have the largest portion of their portfolios invested in real estate (31%) across Asia Pacific’s major economies. This list includes India, Japan, Singapore, Indonesia, Malaysia and even China.

Portfolio Composition of High Net Worth Individuals, Asia Pacific, 2015

graph for Australian HNW article

While Australian HNWIs have the highest allocation to real estate, they have the lowest allocation to fixed income (10%) relative to other countries in Asia Pacific and the global average.

Part of the explanation was a lack of opportunity to purchase Commonwealth Bonds – the Federal Government considered paying off public sector debt and closing the Commonwealth bond market in 2002.

Why Australians prefer real estate to fixed income:

  1. “Our land abounds in nature’s gifts” – this is a line from our national anthem. It resonates in particular with our residential market which has diverse investment options across the country. However, debt issuance by the Commonwealth and state governments to finance budget deficits and support economic growth through the financial crisis has created more opportunity for HNWI.
  2. Accessibility – Real estate investment opportunities are easily accessible through local banks and real estate agents, whereas engaging an intermediary to buy corporate or government bonds is less clear cut. This matters less for a seasoned HNWI, but is still an important cultural aspect.
  3. Tax reasons – for real estate it’s tax free capital gains on your principal residence and tax deductible mortgage payments on an investment property (or “negative gearing”). Equities also offer the advantage of negative gearing as well as franking credits which makes company tax deductible for private investors. But for fixed income – there is no equivalent benefit that provides tax relief.

Negative gearing is the practice of recording a net rental loss to reduce one’s taxable income. According to the Australian Taxation Office, the cohort which reported the most net rental losses in the last 2013 study was in the “wealthy” category; those with taxable income between $100,001 – $150,000. To put this in context, 89% of tax paying Australians had taxable incomes below $100,000.

Ultimately real estate investment in Australia plays a big role, especially amongst our most wealthy, because it speaks to the hip pocket nerve of an Australian investor.

Sources:
Asia Pacific Wealth Report 2015, Capgemini and RBC Wealth Management

World Wealth Report 2015, Capgemini and RBC Wealth Management

Taxation Statistics 2012 – 2013, Australian Taxation Office

[1] Defined as individuals with a net worth of USD 1 million or more

For more information:

Share

Never miss an update from The Investor.

Subscribe Now!