PORTFOLIO MANAGEMENT SERVICES PTY LTD ATCHISON CONSULTANTS. Residential Property Portfolio. September 2017

Transcription

1 PORTFOLIO MANAGEMENT SERVICES PTY LTD Residential Property Portfolio September 2017 Level 3, 155 Queen Street, Melbourne Vic P: +61 (0) F: +61 (0)

2 Table of Contents 1. Introduction Performance Analysis Comparative Total Returns 45 years to June Comparative Total Returns 15 years to June Cumulative Total Returns 15 years to June Rolling Annual Total Returns Total Returns and Volatility of Total Returns Capital Returns by Suburban Cluster Capital Returns by Time of Purchase Capital Returns by Holding Period Summary of Performance Capital and Total Returns from Date of Purchases Summary of Performance Total Returns from June 2002 to June Contribution of Capital and Income Property Capital Returns Grouped by Suburban Clusters Capital Returns by Type of Property and State Downside Risk Analysis Analysis of Purchases and Sales Purchases by Type of Property and Type Holding Period of Properties Portfolio Strategy APPENDIX 1 Methodology

3 1. Introduction Analysis of the investment performance of residential properties acquired and managed on behalf of clients by Portfolio Management Services Pty Ltd (PMS) from 1972 until June 2017 has been undertaken. PMS portfolio comprises of houses and units held in Melbourne, Brisbane, Geelong and Sydney. Total, capital and income returns have been generated for the PMS portfolio. Volatility and correlation of total returns have also been generated. The primary objectives of the study were: Undertaking an assessment of the performance of the portfolio of properties acquired and managed; and Benchmarking the performance of the portfolio against performance indicators for residential property and major asset classes. The study examined the performance of 1024 properties which have been held for greater than two years over the 45 year period. As at 30 June 2017, PMS held 662 residential properties valued, in aggregate, at $438.3m which had an aggregate purchase value of $195.9m. Further details follow: 327 residential properties are located in Melbourne with a current valuation of $261.5m and a purchase value of $99.6m, 145 residential properties are located in Sydney with a current valuation of $167.1m and a purchase value of $87.4m, and 16 residential properties are located in Brisbane with a current valuation of $9.7m and a purchase value of $8.9m. Properties held for only a short period can skew the results. As the basic strategy of PMS is for long term investment, properties held for less than two years have been excluded from the analysis. The Real Estate Institute of Australia (REIA) provides an index benchmarking Australian residential property returns. REIA data has been used as the benchmark for the PMS portfolio in Brisbane, Sydney, Melbourne and for Australian residential property. 3

4 2. Performance Analysis 2.1 Comparative Total Returns 45 years to June 2017 Chart 1 shows the capital, income and total returns of the PMS portfolio and the Australian residential property over 45 years to June Chart 1: Comparative Total Returns 45 years to June 2017 Source: Atchison Consultants, PMS, REIA *approximate ^rounding Returns are timeweighted returns Over 45 years to 30 June 2017, residential properties under management by PMS have achieved a capital return of 8.1% p.a. exceeding the capital return in the REIA benchmark of 7.0% p.a., by 1.1% p.a. With rental income approximating 4.7% p.a., a total return of approximately 12.7% p.a. has been achieved by the PMS portfolio over 45 years to June The PMS portfolio has outperformed the total return from Australian residential property of 11.7% p.a., by 1.0% p.a. 4

5 2.2 Comparative Total Returns 15 years to June 2017 Portfolio Management Services Pty Ltd Residential Property Portfolio Chart 2 shows the total returns of the PMS portfolio, Australian residential property, Australian shares, Australian listed property, Australian commercial property and Australian bonds over 15 years to June A total return of 10.8% p.a. was achieved by the PMS portfolio outperforming by 1.9% p.a. the return from Australian residential property of 8.9% p.a. Chart 2: Comparative Total Returns 15 years to June 2017 Source: Atchison Consultants, PMS, REIA, S&P/ASX, PCA/IPD, Bloomberg Returns are timeweighted returns Over 15 years to June 2017, the PMS portfolio s total return of 10.8% p.a. was higher than the returns of Australian commercial property, Australian shares, Australian listed property and Australian bonds of 10.6% p.a., 8.5% p.a., 6.2% p.a. and 5.9% p.a. respectively. 5

6 2.3 Cumulative Total Returns 15 years to June 2017 Portfolio Management Services Pty Ltd Residential Property Portfolio Comparison of cumulative total returns from the PMS portfolio and a range of asset classes over the 15 years from June 2002 to June 2017 has been undertaken and is shown in Chart 3. Chart 3: Comparative Cumulative Total Returns 15 years to June 2017 Source: Atchison Consultants, PMS, REIA, S&P/ASX, PCA/IPD, Bloomberg Chart 3 shows that over 15 years to June 2017 cumulative total returns of the PMS portfolio from an initial investment of $100 were: higher than the Melbourne and Sydney residential property cumulative total returns. lower than the Australian commercial property cumulative total returns. higher than the Australian shares cumulative total returns. higher than the Australian listed property cumulative total returns. higher than the Australian bonds cumulative total returns. Total return from the PMS Brisbane portfolio have underperformed the broader Brisbane residential property market. 6

7 2.4 Rolling Annual Total Returns Portfolio Management Services Pty Ltd Residential Property Portfolio A comparison of rolling annual total returns from the PMS portfolio and a range of asset classes over the 15 years to June 2017 has been undertaken and is shown in Chart 4. Chart 4: Rolling Annual Total Returns over 15 years to June 2017 Source: Atchison Consultants, PMS, REIA, S&P/ASX, PCA/IPD, Bloomberg As shown in Chart 4, Australian shares and Australian listed property total returns were negative during the Global Finance Crisis in the period Melbourne and Sydney residential property total returns were marginally negative during that period. PMS total portfolio returns remained positive during that period. The correlation of total returns of the PMS portfolio with the total returns for Sydney and Melbourne residential property markets and major asset classes over 15 years to 30 June 2017 is shown in Table 1. Table 1: Correlation of Total Return over 15 years to June 2017 PMS Portfolio Sydney residential property 0.34 Melbourne residential property 0.42 Australian shares 0.06 Australian listed property 0.24 Australian bonds (0.05) Commercial property 0.27 Consumer price index (Inflation) (0.09) Australian cash (0.04) Source: Atchison Consultants, PMS, REIA, S&P/ASX, PCA/IPD, Bloomberg Table 1 demonstrates that over 15 years to 30 June 2017, the PMS portfolio total return has uncorrelated total returns of Australian bonds, Australian cash, Australian shares and inflation and a low correlation with the total returns of Australian commercial property and Australian listed property. 7

8 Over 15 years to 30 June 2017, the PMS portfolio total return has a stronger correlation with the Melbourne residential property market than the Sydney residentail property market. PMS holds most of its properties in Melbourne. 2.5 Total Returns and Volatility of Total Returns Table 2 shows the total returns and volatility of total returns of the PMS portfolio and major asset classes over 15 years to 30 June Table 2: Total Returns and Volatility of Total Returns over 15 years to 30 June 2017 Asset Class Total Returns* (% p.a.) Volatility of Total Returns (% p.a.) PMS portfolio Sydney residential property Melbourne residential property Consumer price index (Inflation) Australian shares Australian listed property Australian bonds Australian cash Australian commercial property Source: Atchison Consultants, PMS, REIA, S&P/ASX, PCA/IPD, Bloomberg *Time weighted returns Total return from the PMS Brisbane portfolio have underperformed the broader Brisbane residential property market. A graphical representation of the total returns and volatility of total returns of the PMS portfolio and major asset classes over 15 years to 30 June 2017 is presented in Chart 5 below. Chart 5: Total Returns and Volatility of Total Returns over 15 years to June 2017 Source: Atchison Consultants, PMS, REIA, S&P/ASX, PCA/IPD, Bloomberg 8

9 Table 2 and Chart 5 show that over 15 years to June 2017, the PMS portfolio achieved a total return of 10.8% p.a. with volatility of total returns, as measured by standard deviation, of 6.3% p.a. Over the same period: Australian commercial property underperformed the PMS portfolio, returning a total return of 10.6% p.a. with a lower volatility of total returns of 2.9% p.a. Melbourne residential property underperformed the PMS portfolio returning a total return of 8.6% p.a. with a significantly higher volatility of total returns of 8.3% p.a. Sydney residential property underperformed the PMS portfolio returning a total return of 8.9% p.a. with a lower volatility of total returns of 4.1% p.a. Australian bonds and the Australian cash underperformed the PMS Portfolio, returning a total return of 5.9% p.a. and 4.5 p.a. respectively but with a lower volatility of total returns of 2.8% p.a. and 0.5% p.a. respectively. Australian shares underperformed the PMS Portfolio, returning a total return of 8.5% p.a. but with a significantly higher volatility of returns of 12.9% p.a. Australian listed property underperformed the PMS Portfolio, generating a total return of 6.2% p.a., with a significantly higher volatility of returns of 16.5% p.a. Total return from the PMS Brisbane portfolio have underperformed the broader Brisbane residential property market. 2.6 Capital Returns by Suburban Cluster Chart 6 shows the range of capital returns for groups of suburban clusters over the period from date of purchase until sold or valuation at June Chart 6: Range of Capital Returns by Suburban Cluster Source: Atchison Consultants, PMS Highest capital returns were achieved in Melbourne East followed by Melbourne North, Melbourne Inner East, Sydney East, Melbourne South and Sydney Inner West. Lowest capital returns were from Brisbane Inner South West, Brisbane Inner North, Brisbane Inner East, Brisbane Inner North West, Brisbane Inner South East and Brisbane East clusters. 9

10 The Melbourne Inner South, Melbourne Inner North and Melbourne Inner West markets reported the widest spread of capital returns over the measured period to June Capital Returns by Time of Purchase Chart 7 shows the range of capital returns of the PMS portfolio for different purchase times. Chart 7: Range of Capital Returns by Time of Purchase Source: Atchison Consultants, PMS Higher capital returns were achieved for purchases made during the early 1970s whilst lowest capital returns were achieved for purchases made during the 2010s. Purchases during the period 2000 to 2005 show the widest spread of capital returns. 10

11 2.8 Capital Returns by Holding Period Chart 8 shows the capital returns of the PMS portfolio by holding period in five year intervals. Chart 8: Capital Returns by Holding Period Source: Atchison Consultants, PMS Capital returns have generally improved as the holding period increased. Highest capital returns have been achieved on properties held between 20 and 25 years. 11

12 2.9 Summary of Performance Capital and Total Returns from Date of Purchases Table 3 shows capital returns of the PMS portfolio measured from the date of purchase until sold or at valuation at June 2017 by location, type of property and time of purchase. A comparison to the REIA benchmark capital returns has also been undertaken. Table 3: Capital Returns PMS Capital Returns From Purchase to Sale or 30/6/2017 Total Qld Vic NSW 70s 80s 90s 00s 10s Units Houses Number Capital Return (% p.a.) Average life (Years) Capital Return (% p.a.) Capital Return (% p.a.) REIA Capital Index Returns From Purchase to Sale or 30/6/2017 Total Qld Vic NSW 70s 80s 90s 00s 10s Units Houses Excess Capital Returns over Index From Purchase to Sale or 30/6/ Capital returns for the PMS portfolio exceeded the REIA benchmark capital returns over all periods to June 2017, except for purchases made during the 2010 period. Capital returns for the PMS portfolio exceeded the REIA benchmark capital returns across Queensland, Victoria and New South Wales. Capital returns for units held within the PMS portfolio of 7.5% p.a. were slightly higher than the REIA benchmark capital returns of 7.2% p.a. Capital returns for houses held within the PMS portfolio of 8.3% p.a. were higher than the REIA benchmark capital returns of 6.9% p.a. 12

13 Table 4 shows the total returns of the PMS portfolio measured from the date of purchase until sold or at valuation at June 2017 by location, type of property and purchase date. Table 4: Total Returns Total Returns From Purchase to Sale or 30/6/2017 Total Qld Vic NSW 70s 80s 90s 00s 10s Units Houses Total Return (% p.a.) Absolute total returns have been very strong across units and houses held within the PMS portfolio. Sydney and Melbourne s total returns were significantly stronger than Brisbane. Properties bought in the 1970s produced the highest total returns Summary of Performance Total Returns from June 2002 to June 2017 Table 5 shows total returns for the PMS portfolio measured from June 2002 to June 2017 across three locations, types of properties held within the PMS portfolio and over various purchase times. A comparison to the REIA benchmark total returns has also been undertaken. Table 5: Total Returns Total Qld Vic NSW 70s 80s 90s 00s 10s Units Houses No Total return (% p.a.) Average life (years) REIA Total Index Returns From 30/6/2002 to 30/6/2017 Total Qld Vic NSW 70s 80s 90s 00s 10s Units Houses Total return (% p.a.) Excess Total Returns From 30/6/2002 to 30/6/2017 Total Qld Vic NSW 70s 80s 90s 00s 10s Units Houses Total return (% p.a.) *numbers are subject to rounding error Over the period June 2002 to June 2017, total returns from the PMS portfolio were higher than the REIA total returns across all locations with the exception being in Brisbane. Total returns from the PMS portfolio were higher than the REIA total returns across both types of properties held within the PMS portfolio. Total returns for the PMS portfolio exceeded the REIA benchmark total returns over all periods to June 2017, with the exception being in the 2010s. 13

14 Table 6 shows the capital returns from the PMS portfolio measured from June 2002 to June 2017 by location, type of property and time of purchase. Table 6: Capital Returns Capital return (% p.a.) PMS Capital Returns From 30/6/2002 to 30/6/2017 Total Qld Vic NSW 70s 80s 90s 00s 10s Units Houses Capital return (% p.a.) Capital return (% p.a.) REIA Capital Index Returns From 30/6/2002 to 30/6/2017 Total Qld Vic NSW 70s 80s 90s 00s 10s Units Houses Excess Capital Returns over Index From 30/6/2002 to 30/6/2017 Total Qld Vic NSW 70s 80s 90s 00s 10s Units Houses Over the period June 2002 to June 2017, capital returns from the PMS portfolio were higher than the REIA capital returns for Queensland, Victoria and New South Wales and for units and houses held within the PMS portfolio and over all times of purchase, with the exception being the 2010s period. Table 7 shows income returns from the PMS portfolio measured from June 2002 to June Table 7: Income Returns PMS Income Returns From 30/6/2002 to 30/6/2017 Total Qld Vic NSW 70s 80s 90s 00s 10s Units Houses Income return (% p.a.) Income returns have been consistently in the 3.5% to 5.1% p.a. range over the 15 year period to June Contribution of Capital and Income Table 8 shows the composition of the total returns of the PMS Portfolio between capital and income. Table 8: Capital and Income Returns over 15 years to June 2017 Returns (% p.a.) Contribution to Total Returns (% p.a.) Capital Income TOTAL 10.8 *rounding Over 15 years to June 2017, approximately 57% of the total returns are attributable to capital returns (after accounting for entry and exit costs and ongoing maintenance) with approximately 43% of total returns coming from net rental income. 14

15 2.12 Property Capital Returns Grouped by Suburban Clusters Portfolio Management Services Pty Ltd Residential Property Portfolio Table 9 shows the capital returns by suburban clusters from date of purchase until sale or June Table 9: Capital Returns from date of purchase until sale or June 2017 Number Capital Return Average life (% p.a.) years Sydney Central Sydney East Sydney Inner East Sydney Inner South Sydney Inner West Sydney North Melb Central Melb East Melb Inner East Melb Inner North Melb Inner South Melb Inner West Melb North Melb South Melb South East Geelong Frankston Bris North East Bris Inner North Bris North West Bris Inner North West Bris Inner South West Bris Inner South East Bris Inner East Bris East Source: Atchison Consultants, PMS From date of purchase until sale or June 2017, PMS properties in Melbourne East and Sydney Central returned the highest capital returns. Brisbane Inner South West and Brisbane Inner North returned the lowest capital returns. 15

16 Table 10 shows the total returns by suburban clusters from June 2002 until sale or June Table 10: Total Returns from June 2002 until sale or June 2017 Number Total Return (% p.a.) Average life years Sydney Central 0 N/A N/A Sydney East Sydney Inner East Sydney Inner South Sydney Inner West Sydney North Melb Central Melb East Melb Inner East Melb Inner North Melb Inner South Melb Inner West Melb North Melb South Melb South East Geelong Frankston Bris North East Bris Inner North Bris North West Bris Inner North West Bris Inner South West Bris Inner South East Bris Inner East Bris East Source: Atchison Consultants, PMS Over 15 years to 30 June 2017, PMS properties in Melbourne East, Melbourne South East and Sydney North returned the highest total returns. Brisbane Inner South West, Brisbane Inner South East, Brisbane Inner South West and Brisbane East returned the lowest total returns over the same period. 16

17 2.13 Capital Returns by Type of Property and State Portfolio Management Services Pty Ltd Residential Property Portfolio Chart 9 shows the capital returns by type being houses and units and by state for PMS properties. The period is from 1972 to June Chart 9: Capital Returns by Type of Property and State Capital returns for houses held within the PMS portfolio of 8.3% p.a. exceeded the capital returns of units within the PMS portfolio of 7.5% p.a, by 0.8% p.a. Capital returns of Melbourne properties of 8.2% p.a. exceeded the capital returns of Sydney properties of 8.0% p.a., by 0.2% p.a. Capital returns of units held in Brisbane of 2.0% p.a. exceeded the capital returns of houses held in Brisbane of 1.6% p.a., by 0.4% p.a. Capital returns of units held in Sydney of 8.4% p.a. exceeded the capital returns of houses held in Sydney of 7.8% p.a., by 0.6% p.a. Capital returns of houses held in Melbourne of 8.4% p.a. exceeded the capital returns of units held in Melbourne of 7.1% p.a., by 1.3% p.a. 17

18 3. Downside Risk Analysis Downside risk analysis of the PMS portfolio and major asset classes has been undertaken over 15 years to 30 June Downside risk is captured by assessing the number of negative total annual returns encountered by the PMS portfolio and other asset classes. Table 11 shows the number of negative annual total returns of the PMS portfolio and other asset classes over 15 years to 30 June Table 11 Number of negative annual total returns and average negative return over 15 years to 30 June 2017 Number of negative total annual return Average negative return (%) PMS portfolio Sydney residential property Melbourne residential property Australian shares Australian listed property Australian bonds Australian cash Commercial property Source: Atchison Consultants, PMS, REIA, S&P/ASX, PCA/IPD, Bloomberg Over 15 years to 30 June 2017: The PMS portfolio, Australian bonds and Australian cash have not experienced any negative annual total returns. Sydney residential property experienced one negative annual total return of 1.7%. Australian commercial property experienced one negative annual total return, of 6.3%. Melbourne residential property experienced two negative annual total returns, with an average negative total return of 7.9%. Australian listed property experienced two negative annual total returns, with an average negative total return of 28.3% during the GFC. Australian shares have experienced the highest number of negative annual total returns with four occurrences and an average negative annual total return of 10.6%. 18

19 4. Analysis of Purchases and Sales Portfolio Management Services Pty Ltd Residential Property Portfolio 4.1 Purchases by Type of Property and Type Chart 10 shows the spread of purchases between units and houses over time. Chart 10: Property by Date of purchase and Type Source: Atchison Consultants, PMS Most of the properties within the PMS portfolio were acquired during the late 1990s and over the last 7 years. 4.2 Holding Period of Properties Chart 11 shows the holding period of properties within the PMS portfolio. Chart 11: Holding Period Source: Atchison Consultants, PMS For the houses which have been sold over the period, the average holding period was just over ten years. A turnover of approximately 9.8% p.a. has occurred. 19

20 5. Portfolio Strategy Based upon discussions with PMS the following principles are applied in the selection and purchase of properties on behalf of its clients: - Properties are within close proximity to major infrastructure including public hospitals and centres of education; Properties must be capable of providing above average rental returns; Properties must be purchased at, or below, replacement cost; Properties are held over the medium to longer term; Capital works are minimised and restricted to bringing outdated properties up to suitable standard to meet tenant demands and to attract appropriate rents. 20

21 APPENDIX 1 Methodology Outline of Study Process Portfolio Management Services Pty Ltd Residential Property Portfolio In order to undertake an analysis of investment performance across the portfolio, a database about the properties was obtained from PMS. This database was "cleaned" and enhanced in order to ensure that all required information was captured and was accurate and in an appropriate format. Where key information was unavailable, secondary data sources were utilised and appropriate assumptions were adopted to derive reasonable estimates of the required data. Data Limitations In the process of undertaking this study, a number of limitations associated with the primary data provided became evident. The manager's database was not comprehensive with respect to all properties acquired on behalf of its clients however it was noted that the sample of properties analysed (1024 individual properties) was considered representative of residential properties purchased over the period under investigation All of the required information was either provided or derived for 1024 properties The database provided full information about the purchase and sale prices of all properties or, alternatively, the manager's current assessment of value (as at June 2017). The consultant has not valued any of the properties in this sample for the purpose of this Study. In relation to the income stream, the details of annual gross rents for 2002 to 2017 were available. Before 2002 capital values only were available. Analysis was conducted in two ways. Firstly, capital returns and income returns for the last 15 years were examined. Capital returns only for the whole period from 1972 were examined. Total returns for this latter period can be approximated by adding an average rental income return to the capital return. Emphasis has been on the capital returns for the whole period. Total returns since 2003 assume a purchase at valuation in The manager has pointed out that they would not have been keen to purchase many of these properties at market value at that time. Many of these properties would now be in suburbs that no longer meet the manager s criteria for new purchases. They would have already seen the growth that is expected as the suburb transitions from being primarily rentals to owner occupation. This means that the returns shown are less than what would be expected from new property purchases. It was understood that historical records of actual outgoings for individual properties have not been retained by the manager and therefore the consultant has relied upon the derivation of the various costs to translate gross rents into a net basis. 21

22 Data Assumptions The Consultants were reliant upon the information provided by the manager. There was no attempt made to verify the accuracy of the data or confirm details relating to the individual properties analysed for the purpose of this study. It was assumed that all information provided by the manager was accurate and reliable. In the absence of actual data relating to particular variables, the consultants have made a number of assumptions. These assumptions have been made after consideration of industry accepted norms. In instances where gross rents were not available for any period, rents were derived by reference to the rental indices for the relevant city published by the REIA. Where end of year market values was unavailable for any period they were interpolated from other periods supplied. Investment Performance Measurement There are a number of techniques available to analyse and measure the investment return of the portfolio and individual properties in the portfolio. The chosen performance measures were: - Time-weighted Internal Rate of Return (IRR) for the portfolio; Capital Value Change; and Standard Deviation of Returns. The Internal Rate of Return (IRR) method of investment performance measurement considers the contributions by both the (net) income stream and the capital value change upon realisation of the asset which together provide the total asset return. The income stream over the holding period of the investment was represented by the gross rent collected from the property less all outgoings associated the generation of the rent. Purchase costs were added to the initial purchase price of each property. The calculation of the IRR was assessed upon the net cashflows (both income and capital) over the holding period. The resultant IRR represents the interest rate at which the investment returns a net present value equal to the purchase price. It is expressed as a nominal, average annual percentage return over the holding period(s). Capital value change reflects one component of the investment return, that is, the difference in underlying asset value which can only be realised at disposal of the property. It is expressed in nominal terms as the average annual percentage change, which makes investments of different holding periods more comparable. An alternative portfolio assessment considered the relative periods of time for which individual properties were held resulting in the construction of a time-weighted IRR model. Given that the portfolio has accumulated over an extensive time period and that investments have been held for varying periods since 1970s, it was considered that those properties held for the longest period should have a greater influence upon the portfolio's overall performance. The standard derivation is a statistical measure of the dispersion around the mean (average) value of a data series. A higher standard deviation implies that there is greater volatility and risk associated with a series of data, namely the IRR data series. 22

23 To provide greater meaning to the results, further analyses was undertaken to highlight differences in investment performance according to individual variables such as length of holding period, year of purchase, location, type of dwelling and other factors. Cashflow Assumptions To construct realistic cashflows in the absence of actual data, a series of assumptions were adopted in the derivation of particular variables. These assumptions were based upon secondary data sources or observations of typical costs associated with property acquisition, management and disposal. Key assumptions affecting the cashflow analysis included: - Acquisition of properties occurred at the mid-point of the financial year and Realisation occurred at the mid-point of the financial year; Acquisition costs (including stamp duty, other taxes, fees and other expenses) equated to 7.5 % of the purchase price; Management and letting fees equated to 9.5% of Gross Annual Rent; Net annual rent was derived by deducting management fees and other costs and outgoings as well as adjusting gross annual rent for a two week vacancy factor per annum allowing for changeover of tenants; Maintenance was assumed to be 6% of annual rents. The above allowances were considered by the Consultants to be generous amounts. Realisation of properties that had not yet been sold was assumed to occur at the end of the period at the current market value. No allowance was made for sale costs as properties are held as long term investments. Cashflow analysis was undertaken on a tax neutral basis given that the tax situation for each investor is unique and investment performance analysis on other asset classes was typically undertaken on the same basis. The analysis also excludes any consideration of capital gains tax implications and potential depreciation benefits; and Cashflows are based upon the assumption of full equity investment without any level of gearing. Source of Information For the purpose of this exercise, information about the individual properties within the portfolio was provided by the manager and the consultant has relied solely upon this information without verifying its accuracy or integrity. In addition, the various indices published by the REIA were utilised. Performance Benchmarks In order to impart relativity to the assessment of the manager's performance, comparative analysis of residential property and other asset classes has been undertaken. The selected comparative benchmarks are: - REIA indices Bloomberg Fixed Interest Indices; and S&P/ASX Equity Indices PCA/IPD Indices 23

24 Sample Composition Number of purchases by purchase period and State All Qld Vic NSW 70s 80s 90s 00s 10s Number Analysis over the various time periods (from the early 1970s to present) showed that the sample was skewed towards the more recent purchase periods with more than half of all purchases occurring from 2000 onwards. This very high proportion represents the residential market recovery and the increased human resources capacity of the manager. Variations in the purchasing activity were also related to the prevailing market conditions and cyclical nature of the property market. Performance of portfolio The most appropriate measure of investment return for the portfolio analysis was deemed to be the internal rate of return (IRR) which inherently takes into account the period of time over which the investment was held. Internal Rate of Return In relation to the portfolio's IRR measure, all cashflows relating to individual properties were summed at the appropriate points in time to arrive at periodic net cashflows. To arrive at a portfolio IRR, it was first necessary to determine the cashflows associated with each of the individual properties related to acquisition, net rents (incorporating fees and other outgoings) and disposal. The sum of these cashflows over the entire length of the holding period was used as the basis of determining the portfolio IRR. 24