28/10/2020 - 09:18

A new strategy: why investors are turning to property debt over stocks

28/10/2020 - 09:18


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Whether starting out as a new investor, or looking to diversify an existing portfolio, the first place most people turn is the stock market.

Photo by Pat Whelen

However, as the past several months have reminded us, stock markets globally can be volatile, requiring patience and a tolerance to capital losses.

Bets are off

The investment media will often focus on the lofty returns that were achieved by those investing at the 23 March 2020 low. How meaningful is this? It was a time when many investors were running for the exit not making fresh investments.

Following a roughly decade-spaced pattern of 1987, 2000, and 2008, the global stock market stock market crash of 2020 was right on schedule, but was also the steepest and quickest bear market decline on record. In less than a month, the market fell 35%, evaporating huge proportions of investors’ portfolio values, and with it, their plans for long-term wealth creation.

The four-year gains from February 2016 to February 2020 were completely erased in a month, with Dow Jones taking just 16 trading days to decline into a bear market, and with S&P500 and Nasdaq Composite following suit the day after. In this scenario, younger investors have the ability to sustain a measure of loss and wait to recover by the time they will likely need to draw on their funds, but those with families or in retirement may not have the same luxury of time.

Operating through tough times

As the market finds its feet once again, these investors have the opportunity to revise their strategic approaches. One such option is investing in property debt, which provides a viable avenue for generating consistent yield in a downturn, with minimal risk to capital.

Property debt investment is able to withstand a much larger degree of stress, and when managed properly can get through tough times, in many cases even thriving in these periods. Over the past decade, for instance, Dorado Property has been investing in first mortgages secured against Australian property. The returns have held steady even throughout Perth’s 22% market decline in residential real estate prices. These first mortgages are a safe option for stable returns, generating 8.0% - 10% p.a. returns.

Portfolios tailored to the individual

However, property debt consists of several broad investment strategies, from the highly secure first mortgage, to subordinate debt options like mezzanine debt or preferred equity, which hold elevated risk profiles but generate returns of 14% p.a. - 25% p.a. With the ability to select each investment, Dorado’s investors tailor their portfolios to the level of risk, and the degree of decision-making control, they are looking for.

Ultimately, the environment we find ourselves in today is where property debt investment shows its strength. While ASX stock investments rise and fall accordingly, property debt remains illiquid, lending a unique form of investment stability without compromising on return.


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