In the current low-rate environment, Australian property has emerged as a popular investment option for investors seeking competitive income. With the aid of low-interest rates, government incentives, economic stimulus, and a shortage of rental accommodation, it’s no wonder why, as strong property growth is predicted into 2021.
However, direct property investment is both intricate and involved. As you near retirement, choosing a property and organising its ongoing management, navigating tax implications and covering out-of-pocket expenses may not suit your financial goals or investment strategy.
If you’re seeking to earn property-based income without direct property ownership, an unlisted property trust may be an investment option for you.
Read on as we discuss key features of unlisted property trusts and factors to understand when considering if an unlisted property trust could suit your investment portfolio.
What is an unlisted property trust?
Unlisted property trusts aim to provide a low-maintenance property investment alternative which generates regular income, without the responsibilities that come with direct property ownership.
When you invest in an unlisted property trust, you are simply purchasing units in the trust. The Trust, managed by a professional fund manager, will purchase a property or property assets and control its ongoing management for you. The Trust aims to distribute income, generated via rent from long-term leases to tenants and other investments, to you and other investors via regular distribution payments.
Your initial capital remains in the trust until the property is sold or a withdrawal offer is made by the trustee. At the end of the investment term, the asset is sold and any profits after fees and expenses are distributed on a pro-rata basis, depending on each investor’s unit holdings.
What are the potential benefits of investing in a property trust?
Property trusts may be included as part of a diversified portfolio for many reasons. Depending on your personal portfolio, financial goals and risk tolerance, benefits of property trusts may include:
1. Regular income
Unlisted property trusts aim to provide you with a regular and competitive distribution income during the life of the trust – so you can focus on the things that matter most. However, distributions are not guaranteed, nor is the return of initial capital invested.
2. Professional management
Unlisted property trusts are professionally managed by a fund manager, so you can earn regular returns on property without having to lift a finger.
The trust’s fund managers leverage their expertise in investment and property to source and acquire properties that meet its investment and risk management criteria, and take care of its ongoing management, such as maintenance, administration, rent collection, and unexpected expenses.
3. Access to property and critical diversification
By pooling your money with other investors in a property trust you may gain access to benefits that may not have been achievable on your own.
You may gain access to properties without the significant upfront capital that would have been required had you purchased the property or properties on your own. The greater pool of capital may also enable the trust to acquire several properties within its portfolio, providing you with a critical level of diversification you may not have been able to achieve on your own.
4. Opportunity for capital growth
You may also receive a ‘capital gain’ on your original investment if the value of the assets in the unlisted property trust, net of fees, have increased upon sale. If they have decreased, it may result in a capital loss.
What to consider when looking to invest in an unlisted property trust
Think an unlisted property trust might be an investment option for you? Read on as we discuss five features of any property trust to consider before making an investment decision.
The decisions made by the fund manager will directly impact how your money is used to generate returns – so it’s important you choose an unlisted property trust that is managed by a strong fund manager. Traits of a strong fund manager may include:
Experience: your fund manager should have developed an in-depth understanding of how the market and property trusts work, so they’re well placed to make calculated investment decisions in your best interest.
Discipline: the ability to adhere to their investment mandate, criteria, and representations to investors.
Proactive risk management: the ability to identify risks and proactively manage their impact on returns.
Customer service: proactive communication about the trust and your investment.
The class of property or properties held within the trust’s portfolio, such as residential, commercial, office or industrial, plays a large role in its overall stability and performance.
Different property classes are exposed to different demand, market and economic trends, risk, lease terms, liquidity and investment goals, and all have their own risks and benefits. It’s important you ensure the property classes and property types included in the trust’s portfolio align with your personal circumstances and investment goals.
A property trust’s cashflow is heavily dependent on rental incomes. Therefore, the credit quality of the tenants and the duration of the leases is critical to the trust’s ongoing performance and value. Longer-term leases generally provide more income security to investors as the income is secured for a greater time period.
Unlisted property trusts are illiquid by nature. It’s important you always take your cashflow requirements into consideration when planning to invest in a property trust and understand the timeframes of the trust you are investing in.
It’s important to be aware of the level of gearing in a property trust. To purchase properties, many property trusts raise some capital from investors with the remainder funded via debt, often secured by one or more mortgages over the properties. Higher gearing ratios generally indicate that a fund has a higher degree of financial leverage and is generally more susceptible to downturns in the economy and the property cycle.
Source: Seeking property-based income without direct property ownership? Nestegg.com.au