Atchison Audit Shows Outperformance…Again

 

Active management, market experience and judicious buying adds value over the long term in the residential property market.

That is our philosophy, but it’s also borne out in the data.

The latest (September 2017) analysis by Atchison Consultants of the investment performance of the residential properties acquired and managed on behalf of clients by PMS shows that the PMS portfolio has generated 12.7% a year total return over the 45 years to June 2017, compared to Australian residential property as a whole with a return of 11.7%, as measured by the Real Estate Institute of Australia (REIA) benchmark index.

The PMS portfolio generated capital growth of 8.1% and income return of 4.7%, versus capital growth of 7% and income return of 4.7% for the REIA benchmark.

With the bulk of the properties in the PMS portfolio having been purchased in the 2000s and 2010s, it is appropriate to look at a shorter time period. Over the 15 years to June 2017, the PMS portfolio has earned 10.8% a year in total return (6.1% in capital growth and 4.7% in income), versus 9% a year for the REIA benchmark.

We’re delighted with the performance of the portfolio, particularly given that it has shown a volatility, over the 15 years to June 2017, of just 6.3% a year (in total return), which is just over half the annual volatility of the share market, at 12.9% a year, and less than two-fifths of the volatility of the listed real estate investment trust (REIT) sector.

We also want to offer investors a return that shows very low correlation with the returns they earn in other parts of their portfolio. Over the 15 years to 30 June 2017, the PMS portfolio total return shows a negative correlation with total returns of Australian bonds, Australian cash and inflation; and a low correlation with the total returns of Australian commercial property (0.27%), Australian shares (0.06%) and Australian listed property (0.24%). This is a very important component of residential property’s role in a broader investment portfolio – both as a source of return, but as an effective portfolio diversifier.

Residential property is an idiosyncratic asset class, in that every property is individual. A major reason why our clients choose to invest with us is that we promise to save the client time and effort by researching the right markets, and identifying the prime properties in those markets.

All of these decisions, from identifying markets, to buying the properties, to ongoing management, is where we add value.

A good example of this is the properties we bought in the Inner North area of Melbourne – primarily in the suburbs of Northcote, Brunswick and Fitzroy – in the late 1990s and early 2000s, based on our appraisal of the potential of those areas for ‘gentrification’ and increased amenity. It’s history now that those areas became flagship areas for Melbourne’s café lifestyle, and became centres of ‘foodie’ culture. Some of the properties we bought in those areas have tripled in value.

Another example is our move into Frankston, in Melbourne’s south-east suburbs, and Geelong, the regional city on the other side of Port Phillip Bay. At the time we were looking to buy in these areas, they were not marquee investment locations – now, they are enjoying significant capital appreciation.

Both of those markets were infrastructure stories – major road developments improved access to those areas, industry followed this improved access, and the activity began to show up in house price appreciation. We were buying in these areas four to five years before this pick-up began. We’re following this philosophy in Sydney, too, where the Sydney Light Rail development will have a huge impact on the city’s south-east fringe.

Understanding these impacts is a major part of the value that we add – and it works.