Australians are stockpiling their wealth in residential property, with new data showing around two-thirds of household wealth is now held in bricks and mortar.
This trend has raised the need for Australians to diversify into other asset classes to reduce financial risk, according to Tim Keith (pictured above), managing director of Capspace.
Household net wealth reached a record $16.2 trillion in the March quarter, boosted by a record level of property assets of $11tn as of March 31. Residential property accounted for approximately 67.9% of net household wealth, up from 61.7% in December 2020.
Households also held $1.46tn directly in equities, $1.73tn in cash and deposits, and $3.88tn in superannuation. The key driver of household wealth gains in recent years has been rising property prices.
“With such a large proportion of individual wealth tied up in property, it makes sense for investors to diversify into other asset classes, to lessen their risk of their wealth falling should residential property prices pull back on higher interest rates and any slowing in the economy,” Keith said.
“While property owners have benefited from property price rises, more defensive assets such as fixed income, and particularly private credit, can deliver more attractive yields than residential property and even fully franked shares.”
Keith highlighted the advantages of private credit, or non-bank loans, as a means to provide investors with a relatively attractive income stream and capital protection through stringent loan processes and security over borrower assets.
“Private credit can deliver investors yields close to 10% per annum, which is almost double typical yields on residential property which fall below 5%,” he said.
“In addition, many private credit loans are floating rate and returns can increase with changes in the cash rate or bank bill swap rate. With inflation remaining sticky, the RBA governor, Michele Bullock, indicated a positive outlook for the returns on private credit, as most corporate loans are floating rate.”
According to Keith, private credit offers an attractive level of regular cash income and return for investors, particularly in comparison to the long-run average returns of more volatile asset classes such as residential property and share markets.
“That is one of the main reasons that Australia’s largest institutional investors are allocating more to private credit assets.
“AustralianSuper is one of the largest investors and has allocated over US$4.5 billion ($7bn) in private credit globally, with the stated ambition to triple its exposure in the coming years. Over time, I expect retail investors to follow the lead of Australia’s largest superannuation funds given the attractions of this asset class.”
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