A combination of higher yields, lower volatility, and reduced correlations to traditional assets have seen a boom in unlisted investments in recent years. For example, in the three years to December 2019, data from The Association of Superannuation Funds of Australia (ASFA) shows that investments in unlisted property grew at almost twice the pace of those in listed property. It’s not just super funds either, anecdotally, there’s been an increase in the number and the range of these products available to retail investors, covering everything from unlisted credit to private equity and anything in between.
The easiest way to explain unlisted property investment funds is through the great Australian love affair with residential property. Everyone’s familiar with residential property; you buy an apartment or a house and rent it out. Depending on what and when you’ve bought over the past few years you’ve probably done well. There’s been solid increases in prices and the added benefit of negative gearing along the way.
The reality though is that often the rental income yields from directly owning residential property can generally be pretty poor relatively speaking and it’s not uncommon to get less than 2% per year after all expenses in some major capital markets.
While interest rates are low and while commercial property yields have reduced over the past few years and values have risen, commercial property as a general statement offers a much higher rental yield. This can be true also of an active unlisted residential property trust. Annual cash yields of 6-7% are still available today with well established businesses and governments as your tenants, typically much longer leases and with the tenants bearing most if not all the running costs mentioned above. Meanwhile a residential property trust or low geared debt instrument can generate gross returns of well over 10% per annum, but when it’s an active development fund there is normally no income involved, but rather capital growth paid on maturity at the end of a forecast term. There’s also the prospect of capital and income growth in addition to the regular income yields in the unlisted commercial trust sector.
Property trusts offer professional, independent management and clear financial objectives and reporting. Their job is to find great properties and make it easy (and profitable) for investors, and while there are many and varied options for this in the commercial space, the CFMG Land & Opportunity Fund is a unique offering in the residential space.