Imagine, just for a moment, that a property trust in which you invest is a duck. I know, it’s an odd request, but please bear with me.
You know it’s a duck because it swims and quacks like one. Every quarter you get a nice, juicy dividend, regular as clockwork, from the rents collected from the trust’s properties.
Well, that’s how it is in most Asian REIT markets where regulations stipulate 70-100% investment into real estate assets (most operate at the top end of this band) with development and other corporate type earnings generally prohibited or capped at low levels.
In Australia, however, there are no such requirements. Unlike most other REIT markets, Australian REITs (AREITs) have more choice in how they generate earnings. The upshot is that while all AREITs look like rent collectors, some generate as much as half of their income from property development, a riskier and more cyclical activity than rent collection.
In some cases – and we’ll soon name them – what looks and sounds like a duck above the waterline is a different beast when you look below it.
To explain how, let’s look at an AREIT’s structure. Most adopt a stapled security format, which entails an investor owning two or more securities bound together through one vehicle. Typically, one is a trust unit that holds the portfolio of property assets, the other a share in a management company that carries out funds management and development-type activities. This is how it looks on paper.