26 Jun 2019

Diamonds and Property!

As a follow on from our last two articles in which we compared diamonds with gold and with superannuation funds, this week’s “In the Loupe” is going to look at rare coloured diamonds vs. Australian property.

The article starts by comparing the long-term returns of diamonds to the returns on Australian property, as well as the recent decline in house prices.

We also look at other characteristics of both investments that are important for investors to consider, with a particular focus on diversification.

Long-Term Returns Favour Diamonds

Whilst residential property prices have increased in value for most of the last twenty-five years, the returns across the nation as a whole have been more subdued over the last decade or so, with prices increasing by just under 5%.

Diamonds, as you can see in the chart below, have risen far more noticeably over this time period.

diamonds vs property

Source: Australian Bureau of Statistics, Fancy Colour Research Foundation (FCRF)

The difference in return between Australian property and pink diamonds adds up to a lot of money when compounded over 13 years.

Any Australian who has had $100,000 invested in an Australian property at the start of 2005 would have seen their property investment grow to just under $200,000 by the end of 2018

That is almost $300,000 short of what the diamond investors are sitting on. Australians who invested $100,000 in intense or vivid pink diamonds back in 2005 would now be sitting on assets worth just under $500,000.

Diamond Returns Have More Stability

Like previous comparisons with gold and with superannuation, rare coloured diamonds come out ahead when we look at stability of returns.

As per the chart below, residential property prices in the five main capital cities have now fallen over 10% in the past two years.

Property decline from latest peak

Source: CoreLogic

It’s even worse in Sydney and Melbourne, with prices down almost 15% in the former, whilst Perth has seen prices fall almost 20% over the past 6 years.

By contrast diamonds are yet to record an annual negative return.

Diversification across Asset Classes is Easier with Diamonds!

Because rare coloured diamonds can be bought in smaller denominations, ranging from AUD $20,000 and up, diversification is easy to achieve.

For example, a person with a $500,000 investment portfolio could easily hold 25% of it in rare coloured diamonds, with the rest split across traditional assets.

With housing it’s a little more complicated, because it’s so expensive. As a result, most property investors have a highly concentrated bet on one asset class.

Diversification within the Asset Class is Easier with Diamonds!

Further the previous point, not only is it easier to diversify across multiple asset classes if you invest in coloured diamonds compared to property, but it’s also easier to invest within the asset class itself.

As mentioned with property, most investors are purchasing one specific asset. For example, most investors aren’t going to own a house in Sydney, an apartment in Queensland and a unit in Melbourne. They typically have no diversification within the asset class.

With coloured diamonds this is not the case, as an investor can easily diversify across multiple stones of investment quality.

It’s Easier to Rebalance a Portfolio with Diamonds

As a final point on diversification – it’s easier to rebalance your portfolio with diamonds. For example, if you have $200,000 of diamonds in your portfolio, held across four stones of equal value, you have the ability to reduce your holding by selling one $50,000 stone at a time.

This is not possible with a residential property – you can’t just sell the bathroom to your house. You either own the whole thing, or you own nothing.

Liquidity is Similar

It can often take more than two months to sell property in Australia, with the time it takes increasing over the past couple of years, as the market has slowed.

This is broadly in line with how long it can take to sell a diamond.

You can Invest in Both Assets Using Superannuation!

Provided you have a SMSF, you can invest in both rare coloured diamonds as well as residential property, though there are a couple of important differences to be aware of.

The main difference between the two is that as property typically requires leverage, you’ll likely need to arrange a Limited Recourse Borrowing Arrangement (LRBA) for your SMSF.

The second point to note is that in the aftermath of the Royal Commission, we’ve also seen a lot of banks recently walk away from SMSF property lending.

As a result, whilst in theory you can use your SMSF to invest in property, in practice it will likely be a more complicated process compared to investing in diamonds.

Diamonds Don’t Require Leverage

Another benefit of diamonds is that they don’t require leverage to invest.

Whilst this is technically true of housing, in that there is nothing to stop someone paying for a property with cash they’ve saved in the bank, most investors will have to borrow in order to invest in the asset class.

This brings with it additional costs (bank interest, etc.) risks and complexities that don’t exist if you choose to invest in rare coloured diamonds.

Conclusion

Rare coloured diamonds have outperformed the residential property market over the past decade and a half, and have done so without experiencing drawdowns.

Liquidity for both asset classes is similar, whilst both asset classes can also be invested in using superannuation, provided you have a SMSF.

From a diversification perspective, portfolio flexibility is easier to achieve with rare coloured diamonds, given they can be purchased from as little as AUD $20,000.

If you would like to know more, please get in touch. Helping people invest in diamonds is something we help clients of Australian Diamond Portfolio do every day.

 

Share this