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The Role Of Gearing In The Australian Property Investment Market

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  • Anthony De Francesco

Abstract

In an attempt to provide some guidance for ëoptimalí gearing levels, a stylized study was conducted to examine the trade-off between asset return, risk and gearing. The study made use of historical property returns sourced from the PCA/IPD investment index. The study highlights that risk rises with rising gearing levels. A variation in geared returns is caused by the leverage effect on ungeared returns and changes in the cost of debt (or interest rates). The study suggests that current gearing levels in LPTs and unlisted wholesale property funds are relatively conservative. This implies that current gearing could be increased, in particular for wholesale funds, without taking-on substantially more risk whilst enhancing returns. This is further supported when one overlays a benign medium-term outlook on interest rates..

Suggested Citation

  • Anthony De Francesco, 2006. "The Role Of Gearing In The Australian Property Investment Market," ERES eres2006_167, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2006_167
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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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