Understanding Unlisted Property Trusts
Unlisted property trusts have been among the best performing asset classes of the last 5 years. Here's what to know before investing.
Amid the intensifying pursuit of higher yielding returns with acceptable risk, unlisted
property trusts are emerging as an attractive vehicle for retail investors and self-managed superannuation funds.
As the Property Council of Australia/MSCI unlisted retail property fund index shows, the
sector returned an average 13.7 per cent in the 2018-19 year. This compares with 11.9 per cent for Australian equities and 5.9 per cent for global shares.
Cash in the bank yielded a mere 1.9 per cent and further official rate cuts since then mean that investors can expect even lower returns this financial year.
Over five years, unlisted property also easily outperformed: up 21.6 per cent compared with listed property (12.6 per cent), Australian equities (8.8 per cent), global equities
(8.6 per cent), fixed income (7.6 per cent) and cash (2.2 per cent).
Until now, the unlisted sector has been overshadowed by the listed property trusts
(commonly known as real estate investment trusts, or REITs) and has been more the domain of professional investors.
But a growing number of providers are targeting retail investors including
Cromwell Property Group, Charter Hall, Centuria and Australian Unity (which has the country’s most widely held healthcare property fund).
“People are discovering unlisted funds a bit more,” says Cromwell Property Group head of funds management Hamish Wehl.
As with REITs, unlisted property trusts enable retail investors to access large assets (such as shopping centres or CBD office towers) via a pooled vehicle. Any debt is at fund-level and non recourse, which means investors are not liable for any amount beyond their sum invested.
Offers to retail investors must have a product disclosure statement, which outlines all fees and costs in a consistent and transparent manner.
In common with their listed cousins, unlisted trusts offer regular income by way of monthly, quarterly or six monthly distributions.
Unit holders share in capital gains on disposal of an asset.
As listed vehicles, REITs can be affected by broader day-to-day share market movements.
“The returns [on unlisted trusts] are less correlated to the share market so unit prices are less volatile and reflect undervalued assets,” Wehl says.
Most unlisted trusts (often called syndicates) are ‘closed end’, with a fixed life of five to ten years. Because liquidity is normally nonexistent, investors are expected to remain until maturity (at which point they vote to either wind up the fund or extend its life).
While the unlisted units cannot be bought and sold on market in the same way as a listed REIT, the funds usually ensure liquidity by holding a certain amount of cash (in some cases, liquidity is generated by selling assets).
“These funds tend to hold a number of assets to increase diversification,” Wehl says. “But it is at the manager’s discretion to buy or sell assets, so investors must have confidence in their ability to do so successfully.”
In essence, unlisted property funds are the closest proxy to direct property investment – but with the benefit of professional management.
As with all property investments, performance ultimately depends on underlying factors such as vacancy levels and rental growth. The low-yield environment means that buyers have been willing to pay more for assets, especially in the well-performing office and industrial sectors.
Zenith Investment Partners head of property and listed strategies Dugald Higgins warns that some smaller funds have geared up to buy B-grade assets such as shopping centres, with little breathing space on banking covenants if the market turns sour.
The risks are compounded when the fund borrows to buy an asset in the expectation of
replacing the debt with fresh equity inflows. This practice tripped up many funds during the global financial crisis.
He says investors should be clear on how a fund is generating its returns over and above collecting rents.
“If someone is offering a 25 per cent return, is it because they are leveraged to the eyeballs or because they are pursuing a value added strategy which is not risky if they have safeguards?”
Higgins also fears many investors have been “glazing over” the issue of low liquidity, which means they may not be unable to exit the fund if their circumstances change and they require cash.
“In property your entire portfolio is illiquid and you need to be conscious of the risks,” he says.
While many funds espouse asset diversification, Stronghold Investment Management head of finance Bruce Anderson says investors should consider the management’s specialist strengths.
The Brisbane based funds manager invests in suburban offices and business parks.
“The biggest risk you take in this business is launching into an asset you don’t understand,” Anderson says. “Specialisation is something we put in advance of diversification; we don’t try to be everything to everyone.”
Zenith’s Higgins urges investors to treat unlisted property with a ten-year investing horizon and to allocate only a portion of their portfolio to this asset class.
“If you are worried about liquidity, this is not the asset class for you and you would be better off in a listed REIT.”
Wehl adds that investors should treat unlisted property as only part of their overall asset
allocation: “We don’t want a significant portion of an investor’s wealth (in our funds)."
Article published in The Australian, Monday 9th December 2019