Published on June 30th, 2016
Why is diversification so important in property investment? [Video]
One of the first things that anyone looking to invest learns is the importance of diversification. As sunlight is to plants, diversification is to investors. But what does it mean when it comes to property in particular, and why do so many people keep going on about it?
Defining diversification in property
When looking at shares, stock, foreign currency or any other kind of investment, diversification translates to having a finger in a bit of every pie. A few stocks in that company, some more in another one, perhaps a little bit in sterling and more in US dollars.
The reason for doing this is so that if the market suddenly collapses in any of those assets, you still have some investments elsewhere that will either be unaffected or less affected. It's about not putting all your eggs in one basket.
Property operates in much the same way. Investing in one commercial property, one residential property and one industrial property is like investing in the stocks of three different companies. While they are still all the same type of asset, they exist within different markets with different demands, price points and value increases.
The power of geography
You shouldn't be concentrating your efforts solely within the capital cities.
However, there is also the axis of geography, which becomes particularly important with real estate. This ranges from buying in different suburbs in the same city to investing in different cities entirely. Property goes through cycles on a nationwide, but also on a citywide, scale.
Melbourne, for example, has recorded a huge 13.9 per cent year-on-year value increase up to the end of May, according to CoreLogic RP Data. Meanwhile, Perth has been sucked down by 4.2 per cent over the same period. This does not mean that it is going to last forever though. Melbourne has recently had a spate of new apartment buildings either being approved or entering construction, demonstrating an impending oversupply. As a result, the value increases might drop. Having a property in multiple areas protects against that.
You shouldn't be concentrating your efforts solely within the capital cities either. CoreLogic reports that some regional areas have had enormous upshifts in demand over the last year. Meanwhile, the Real Estate Institute of Western Australia reports that regional WA has actually outpaced value growth in the capital of Perth.
Ultimately, diversification in property is about buying a diverse range of real estate across the whole of Australia. This protects you against collapse, but also allows you to take advantage of increases in value as well. Want to diversify your current portfolio? Make sure you get in touch with a local Australian real estate agent to discover a wide range of properties available for you right now.