There’s an innovative approach to residential development and funding delivering property-based returns to investors in a market seeking yield-based alternatives.
In the prevailing environment of historically low interest rates, and despite the pandemic, Australian property continues to emerge as a popular option for investors seeking either growth or income – or both.
With the aid of continued low rates, government incentives, economic stimulus and a shortage of rental accommodation, it’s no wonder that Australian property continued with another bumper year in 2021 and has followed the trend early in 2022.
However, direct property investment can be intricate and very involved. As Australians near retirement, choosing a property and organising its ongoing management, navigating tax implications and covering out-of-pocket expenses may not suit everyone’s financial goals or investment strategy.
If seeking to earn property-based income without direct property ownership, an unlisted property trust or similar style of product might be a suitable investment option.
What types are out there?
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.
Other property funds are operated via a special purpose vehicle (SPV), with investors sharing in potential profits from either raw development, capital improvements, planning application or basic property growth.
What are the potential benefits of investing in these types of opportunities?
Property trusts or similar may be included as part of a diversified portfolio for many reasons. Depending on an individual portfolio, financial goals and risk tolerance, benefits of these investments may include:
- Regular income
Unlisted property trusts aim to provide you with a regular and competitive distribution income during the life of the trust – so investors can focus on the things that matter most. However, distributions are not guaranteed, nor is the return of initial capital invested.
- Professional management
Unlisted property trusts and SPVs are usually professionally managed by a fund manager, so investors can earn regular returns on property without the requirement to take on debt or management of a property asset themselves.
The fund managers leverage their expertise in investment and property to source and acquire properties that meet their investment and risk management criteria. This may include management, such as maintenance, administration, rent collection, and unexpected expenses. This can also include active development, capital improvement and value adding via development approvals or zoning changes.
- Access to property and critical diversification
By pooling money with other investors in a property trust or SPV, investors may gain access to benefits that may not have been achievable as a single investor.
Investors can gain access to properties without the significant upfront capital that would have been required to purchase the property or properties directly. The greater pool of capital may also enable a trust to acquire several properties within its portfolio, providing investors with a critical level of diversification unable to be achieved when investing directly. This investment pool also allows for higher value purchases with little or no debt.
- Opportunity for capital growth
Investors may also receive a “capital gain” on the original investment if the value of the assets in the unlisted property trust, net of fees, have increased upon sale.
What to consider when looking to invest in an unlisted property trust or indirect property investment
The decisions made by the fund manager will directly impact how investor capital is used to generate returns – so it’s important to choose an investment that is managed by a strong fund manager. Traits of a strong fund manager may include:
Experience: The fund manager should have developed an in-depth understanding of how the market and property investments 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 your investment.
Track record: While ‘past performance is not considered a reliable indicator of future performance’ it is important to understand a manager’s track record of delivery, particularly in relation to invested capital and published forecast returns.
The class of property or properties held or developed, 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 to ensure the property classes and property types included in the investment align with an investors 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. This is really only relevant to trusts as most SPV-style investments involve development or value add via approvals or re-zoning.
Unlisted property trusts and SPVs are illiquid by nature. It’s important investors always take cashflow requirements into consideration when planning to invest in a property trust or SPV and understand the timeframes of the investment.
It’s important to be aware of the level of gearing in any investment. To purchase properties, many managers 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: How to invest in residential property without buying a house. Ross Stiles for CFMG Capital