What is an AREIT?
For a long time, AREITs were known as listed property trusts (LPT’s), a specific kind of commercial property investment structure that allowed ordinary investors to own a portion of a commercial property portfolio without being a millionaire. Examples include Dexus, GPT, and Scentre Group.
In 2008, Australia fell into line with other countries that use the term REIT, or Real Estate Investment Trust. We put ‘Australian’ in front of it, which is why property trusts are now known as Australian Real Estate Investment Trusts (AREITs, sometimes written as A-REITs).
This is a change in name but not in purpose. An AREIT allows you to invest in commercial property through the purchase of a part of its commercial property portfolio, bought and sold on the Australian Stock Exchange (ASX) like any other share.
AREIT ownership entitles you to an equivalent portion of the dividends it pays, called distributions, and the capital growth it delivers. This comes without the risk, expense or capital outlay of purchasing and owning an entire commercial property yourself. Of course, there are pros and cons, but for income investors, they can be an attractive option.
What is the key difference between residential and commercial property investing?
For decades, residential property investing has been the dinner party topic of choice. Buy a place (assuming you can afford the deposit) and negatively gear it on the basis that the capital growth will exceed the relatively low rental yields.
Commercial property isn’t like that. The AREIT sector’s focus is on delivering an attractive, stable yield, primarily from the rent collected from tenants. AREITs are therefore seen as more defensive investments where capital growth is secondary to yield.
Whilst the foundations of residential and commercial real estate are bricks and mortar, commercial property investing tends to attract investors primarily focused on income whilst residential investing emphasises capital growth.
There are other differences, including ease of access to markets and liquidity, but buyer motivation and the source of future returns are seen as the key difference between investing in commercial versus residential property.
How do AREITs work?
Before the advent of AREITs, the only way to invest in commercial property without buying a building outright was via a property syndicate, an illiquid fund that used to be the preserve of specialist investors. It was not possible to purchase a part of a shopping centre, warehouse or hospital in a way that made buying and selling easy and low cost without much capital outlay.
The advent of the listed property trust sector in the 1970s changed all that. Now anyone can access commercial property indirectly, buying and selling small parcels of real estate much as one does an ordinary share, with minimal upfront capital commitment.
An AREIT is a publicly-listed company that pools investor funds much like a managed fund. But instead of buying shares, an AREIT purchases and manages a portfolio of commercial properties, which might include office buildings, shopping centres and warehouses.
AREIT managers are responsible for the upkeep of their buildings, leasing the space and collecting the rent from tenants, charging a fee for their services. In return, AREIT investors avoid the hassles of owning and managing commercial property. They are also responsible for maximising and distributing the income the AREIT receives, primarily from rents, to their investors.
In Australia, some trusts operate as stapled securities, where a development or funds management company is attached to the trust. This enables the AREIT to potentially deliver to investors higher growth as it has a broader range of earnings sources. However, these earnings are more volatile than collecting steadily growing rent from a tenant over the term of a secured lease.
Stapled securities with large components of corporate earnings should be considered differently as they are more akin to the real estate operating companies seen in offshore markets than a traditional REIT.
No matter their structure, it is the rental income stream, asset values and the value that the market places on those things that typically determine an AREIT’s value over time.
What type of AREITs can I invest in?
In addition to the usual categories of office, retail and industrial, AREITs also offer access to other kinds of commercial real estate including healthcare property, childcare centres, convenience stores and data centres. Despite the growing variety, commercial property investing is usually categorised into three areas:
- Investing in retail real estate – This includes buildings like shopping centres – your local Westfield for example – retail shopping strips, restaurants, service stations and convenience outlets.
- Investing in office real estate – These are the towers that mark the skyline of Australia’s major cities and the office parks that dot suburban areas. They tend to be occupied by larger local and multinational businesses.
- Investing in industrial real estate – From simple warehouses and distribution centres to highly specialised facilities, these are the places where things are made, stored, distributed and where new products are developed.
There are over 30 AREITs listed on the ASX, offering exposure to the three core commercial property sectors (office, retail and industrial) along with those that specialise in owning non-core assets such as aged/childcare, hotels, service stations, storage assets.
What is the average return on AREITs?
Over the last decade to 30 June 2019, the S&P/ASX 300 AREIT Accumulation Index has returned 14.03% p.a.
The APN AREIT Fund (the red line), an actively managed portfolio of AREITs, has delivered an average yield of 8.27%1 over the same ten year period.
Investing in AREITs is not risk-free, although it is generally assumed to be lower risk than investing in ordinary shares. An ordinary listed company pays dividends from the profit it makes, which can change rapidly from year to year. Because an AREIT typically pays dividends (called ’distributions’) from rents collected rather than profits, the income stream is generally more predictable and reliable.
Are AREITs a good investment in 2019?
As of 30 June 2019, the 10-year bond yield was 1.32% while the S&P/ASX 300 AREIT Accumulation Index offered a yield of 4.46% and the APN AREIT Fund offered a yield of 5.90%2. Of course, different risks are attached to each. Bonds are government-guaranteed in a way that every other investment is not.
Judging a return should, therefore, be assessed in light of the risks taken to achieve it. Whether this amounts to a sound case for investment depends on your circumstances, tolerance for risk and investment objectives, plus a number of external factors, including the state of the economy and the level of interest rates.
If you’re in search of regular, reliable income and have an investment time frame of 5-7 years, AREITs are worthy of your consideration.
How do I choose an AREIT?
In our view there are six factors to consider;
- Quality of management – Factors like the ability to achieve rental increases, sensibly manage properties, negotiate with tenants, provide reliable dividends and manage debt will help you build an overall picture of management quality and skill.
- Portfolio diversification – No investment should be made in isolation. If your AREIT portfolio is overexposed to one particular sector your diversification risk increases. Consider each investment in light of how it will affect your overall portfolio.
- Earnings, dividends and growth – Whilst past performance is no guarantee of future returns, examining an AREIT’s financial history and how it has translated to investor returns will give you a better feel for the company and its assets.
- Debt levels – Debt is an important factor in every business and AREITs are no different. Prior to the global financial crisis, the AREIT sector had a debt binge that was followed by an unprecedented liquidity crisis. Since then the sector has returned to its knitting with debt levels near post-1999 laws. Debt levels are a major driver of AREIT returns and they should always be watched carefully.
- Exposure to non-rental sources of income – Australian Real Estate Investment Trusts are unusual in that regulations permit them to generate a large component of their earnings from non-rental sources such as development and funds management. In Asian REIT markets these riskier earnings are either prohibited (Japan) or limited to maximum levels (10% in Hong Kong; Singapore 25%). Income from funds management and property development – the typical sources of non-rental income for AREITs – is generally more volatile. Check each AREIT to determine the extent of non-rental related income and read The Goodman effect for a real-life example.
- Use other valuation metrics – Here, you have a smorgasbord of options. Take your pick from net asset value (NAV), price-to-funds-from-operations (P/FFO), net tangible assets (NTA) and capitalisation rate.
I don’t want to build my own AREIT portfolio. What options do I have?
If you don’t have the time, skills or inclination to build your own AREIT portfolio but still want to access the benefits and income stream of AREIT investments you have two choices.
The first is to invest in a property securities fund like the APN AREIT Fund. This gives you immediate access to a team of expert commercial property analysts. They determine which investments to buy, hold and sell, with the aim of maximising your returns and income stream.
For a fee of less than 1%, you get immediate diversification, simple administration and a monthly distribution paid into your bank account, leaving you free to get on with your life.
If this doesn’t sound like your thing, you might want to consider an unlisted property trust, sometimes known as a syndicate like the APN Regional Property Fund. When you invest in this structure, you’re only one step removed from direct ownership, which gives you a higher degree of visibility and financial involvement in the properties themselves, but also a higher degree of risk.
- An Australian real estate investment trust (AREIT) is a company that owns and operates income-producing commercial properties;
- AREITs can be bought and sold just like ordinary shares;
- As most of their returns come from dividends, investors reliant on income tend to be attracted to AREITs;
- AREITs offer many different types of commercial property investment exposure, from shopping centres, offices and warehouses, to healthcare buildings and data centres;
- In the decade to 30 June 2019, the APN AREIT Fund has provided an average annual yield of 8.27%1 ;
- If you don’t have the time or skills, consider a property securities fund like the APN AREIT Fund or a property syndicate.
1. As at 30 June 2019.
2. As at 30 June 2019. Current running yield is calculated daily by dividing the annualised distribution rate by the latest entry unit price. Distributions may include a capital gains component. Distributions are not guaranteed and past performance is not an indicator of future returns.
There was a time when investing in commercial property was “all or nothing” affair. It was impossible to purchase a part of a shopping centre, warehouse or hospital in a format that made it easy to buy and sell. Everything was purchased and sold in its entirety, which is why to this day many investors think commercial property is beyond their means.
The advent of the listed property trust (AREIT) sector in the 1970s changed all that (read our AREITs: The 2019 Essential Guide). The first Australian AREIT – General Property Trust – was listed in 1971. At June 2019, there are 28 AREITS with a combined market capitalisation of $170bn in the AREIT 300 Index, with several other smaller AREITs owning high quality commercial real estate not included in the index.
Investors now have the option of investing directly in AREITs or using property securities funds, which have experienced management teams doing the leg work for investors.
Commercial real estate investing has also expanded to include unlisted property trusts, sometimes known as syndicates which are focused on secure income and, generally, a fixed term which removes daily volatility.
Therefore, investors have a range of options to access commercial property markets that provides income and sustainable growth benefits for which the asset class is renowned. In addition to this comes with minimal upfront capital commitment.
Why choose Australian Real Estate Investment Trusts (AREITs)?
You may not know of the term, but you will almost certainly know the names. Scentre Group (owner of Westfield Shopping Centres), Dexus and Mirvac are but three well-known AREITs. There are many more.
In fact, because many investors the world over want reliable, stable yield, each major global share market has its own ‘real estate investment trust’ (REIT) sector.
AREITs are trusts that own, manage and operate income-producing commercial real estate. Listed on the Australian Securities Exchange (ASX), AREITs can be traded just like ordinary shares, allowing investors to purchase an interest in a diversified, professionally managed portfolio of real estate in much the same way as you would purchase shares in a portfolio of companies.
There are seven major benefits of using AREITs to gain exposure to the commercial property sector:
1. Easy to build a diverse portfolio
The AREIT sector includes thousands of properties, from shopping centres, commercial office space and healthcare facilities to medical centres, data centres and warehouses. You can even access REITs in Asia, Europe and the US, making it easy to build a diverse portfolio of commercial property assets. Or you can invest in a property securities fund like APN’s AREIT Fund and Asian Fund, which, for a fee, delivers an instant, diversified portfolio with expert management.
2. Simple to buy and sell
Investing in AREITs is as easy as trading ordinary shares, and just as cost-effective. And because there’s a liquid market for most securities you can usually buy and sell when you want. Of course, you’ll need a broking account, but once you’ve got that you’re good to go.
3. Low entry costs
Compared to the large capital commitment required when directly purchasing a commercial property investment, buying AREITs requires only a small capital outlay – as little as the minimum parcel of securities required by your broker.
4. Relatively high yields
Due to their trust structure, AREITs generally pay out a higher percentage of earnings as distributions than ordinary shares. They also tend to offer a more dependable, higher yield than that usually available from residential property, or from dividend-orientated shares like the major banks or Woolworths, for example. Because income is typically sourced from rents rather than more volatile corporate earnings, the sector tends to attract investors reliant on a regular income.
5. Management expertise
Each AREIT is managed by a team of specialist property and investment experts focused on maximising rental returns and long-term capital growth for their investors. This also removes the need of investors to participate in rental negotiations, building maintenance and the like.
6. Capital growth
Growth is generally consistent with inflation over the medium to long term, adding to AREITs’ defensive qualities. Although there is an element of capital growth, AREITs tend to be income-driven investments, which is why they attract investors seeking a stable, sustainable income stream from commercial property, with little up-front investment.
What are the risks1?
As with ordinary shares, AREITs can sometimes be relatively cheap and at other periods over-priced. There’s a risk that you might buy and sell at the wrong time.
Then there’s the need for diversification, across various sectors and geographies. Building a sensible, high-performing portfolio of AREITs requires similar skills to building a portfolio of listed shares. You may not have the time or inclination to acquire those skills.
Finally, there’s the risk that every self-directed investor takes; whilst acquiring sophisticated analytical skills – assessing an AREIT’s debt levels, management capability and earnings capacity for example – is one thing, applying them successfully at a time of high emotion is quite another.
It’s for these reasons that some AREIT investors prefer to pay expert professionals to develop and manage a high-performing commercial property portfolio on their behalf.
How have AREITs performed?
AREITs generate most of their income (circa 55-70%) from the rent collected from the tenants of the retail, office and industrial properties they own. The chart below shows total returns over five and 20 years by sector.
The above chart shows the importance of income to total returns. Of course, the associated risk is greater than a term deposit but it’s typically lower than the kind of yield you might get from ordinary shares.
Over the last decade, AREITs have delivered an income stream, in the form of a distribution yield, consistently above the 10-year bond rate.
What is the outlook for 2019?
In the 2019 financial year, the S&P/ASX 300 AREIT Index returned 19.4%, the strongest result in three years and 8% higher than Australian equities.
Declining interest rates have played their part. In the short term at least, as interest rates decline, the stability of the income stream an AREIT delivers tends to be valued more highly. Whether this continues is impossible to say.
There are also some sector-specific issues at play. The out-of-favour retail sector returned -0.9% over the year to April 2019 while the office sector returned +35.8% and industrial a staggering +47.5%.
JPMorgan forecasts earnings per share (EPS) growth of 3.6% (up from 3.3%) in 2020, with FY19 distributions (DPS) expected to grow by 3.2% (down from 3.8%). Given the low growth environment and inflation below the Reserve Bank’s target rate, this would be no small achievement.
AREITs should be considered as a long-term investment. Over a five to seven-year period, we estimate investors can expect an 7-10%2 p.a. return from AREITs, most of it derived from income, plus growth that typically equates to the rate of inflation.
Recent returns have been greater, driven by lower interest rates and non-traditional investors seeking yield and capital insulation. An annual return of around 10% over the long term, however, remains a good rule of thumb.
1. General risks apply to an investment, refer to the APN AREIT Fund PDS to read a list of all the risks an investment carry: https://apngroup.com.au/wp-content/uploads/2019/07/AREIT-PDS_JUN2019_combined2.pdf
2. APN Estimation as at August 2019. This article contains “forward-looking” statements. Forward looking words such as, “expect”, “anticipate”, “should”, “could”, “may”, “predict”, “plan”, “will”, “believe”, “forecast”, “estimate”, “target” and other similar expressions are intended to identify forward-looking statements. Forward-looking statements, opinions and estimates provided in this article are based on estimates and assumptions, hence are inherently subject to significant uncertainties and contingencies. Many known and unknown factors could cause actual events or results to differ materially from estimated or anticipated events or results reflected in such forward-looking statements. Past performance is not necessarily an indication of future performance. The forward-looking statements only speak as at the date of this article and, other than as required by law, APN disclaims any duty to update forward looking statements to reflect new developments. To the fullest extent permitted by law, APN makes no representation and give no assurance, guarantee or warranty, express or implied, as to, and take no responsibility and assume no liability for, the authenticity, validity, accuracy, suitability or completeness of, or any errors in or omission, from any information, statement or opinion contained in this article.
Commercial property tends to be seen as a defensive, income-focused, lower capital growth investment. Residential property, in contrast, is viewed as a more speculative activity.
The table below makes the point. Note commercial property has an effective cash yield close to double that of residential yields.
Then there’s the short-term leases in residential compared with commercial, the more volatile returns and legal protections favouring residential tenants. There are risks that residential property investors take that commercial property investors do not.
But it’s the intention behind the investment that’s the biggest difference; because effective cash yields are typically lower, residential property investors are in effect banking on higher capital growth to compensate for a yield that may not even beat inflation.
Commercial property, meanwhile, is regarded as a defensive investment due to the predictability of rental income sourced from a diversified pool of high-quality tenants. Even during volatile economic conditions, the rent continues to be paid due to the contractual obligations of the lease.
Residential v Commercial – The key differences
|Residential property||Commercial property|
|Effective cash yield 1||2-4% per annum||Around 4-7% per annum|
|Property types||Houses, apartments, flats and townhouses||Office, retail, industrial, and others such: as healthcare, hotels and storage facilities.|
|Leases||Short term (typically one year)||Long term (typically 5+ years)|
|Rental reviews||Upon lease renewal, determined by local market conditions||Most lease contracts have locked-in annual rent reviews linked to fixed rates or CPI|
|Tenants||Individuals||Businesses, ASX-listed corporations and government bodies.|
|Legal protection||Across states the Residential Tenancy Act favours the tenant||Generally, balanced legislation between landlord and tenant. Commercial tenancy agreements are dealt with as business contracts and are negotiated at arm’s length between the parties.|
|Property costs||The tenant is required to maintain good order. Costs are largely borne by the landlord.||Most leases will provide for outgoings to be paid by the tenant and typically include: council rates, water rates, land tax, insurance, strata levies and property management fees.
Tenants are required to “make good” or return property to the original condition at the start of the lease. Majority of costs are borne by the tenant.
It’s horses for courses, really. You may be happy to assume that residential property prices will rise, and you may be okay with an effective cash yield not much better than that paid by a risk-free term deposit. There are many people making the same choice, in which case commercial property may not be what you’re looking for.
But if your focus is on a higher, more stable income from which you can cover day-to-day living expenses, with the potential for sustainable capital growth on top, commercial property may well be a suitable choice for you.
How commercial property has performed
Does this mean the benefits of a stable, regular income come at the expense of total returns? Not at all. The chart below shows that since December 1984 commercial property has delivered a total return (income plus capital growth) of 9.4% p.a. over the past 34 years!
IPD Australia All Property Index
Still, most income investors would probably have been happy with these returns of this nature over the past 34 years. An impressive figure, especially taking into account the level of risk. Of course, investments can go up and down and past performance is not indicative of future performance.
Why commercial property is an excellent defensive investment
Why is commercial property regarded as a defensive investment? Mainly because of the predictability of the rental income and cash flows it delivers. As a potential commercial property investor, it’s a good idea for you to understand the three main reasons for the sector’s defensive attraction.
1. Rent is predictable; a business’s profitability is not
Think of an ordinary listed investment like a bank or supermarket. Shareholders in BHP or ANZ Bank receive a dividend only if the business makes a profit. And the level of that dividend depends on the extent of the company’s profit. If times are good, everyone’s a winner. If not, the dividend may be cut or halted altogether. When cash flows are volatile, so too is the income paid to shareholders.
Now think of the rent these companies have to pay for the premises they occupy; the commercial offices, warehouses and retail outlets. These are essential for them to be able to operate and generate sales. And whether they’re profitable or not, BHP and ANZ must pay rent to the owners of these properties each and every month, regardless of their profitability.
For commercial property investors this is the source of the sector’s defensive strength. Rent must be paid regardless of profitability, which is why the income from property trusts can be relied upon each and every month when dividends from ordinary listed companies cannot. If sales have slowed, BHP and ANZ still need to pay the monthly rent.
2. Long contracted lease terms provide reliable income
In residential markets, lease terms often run for just a year. In commercial property, they’re usually contracted over five years and it’s not uncommon for 10, 15 or even 20-year leases. In addition, rents cannot usually fall over the period of the contract.
It’s the rent collected from tenants, secured by long-term lease agreements, that delivers the distribution of relatively high, sustainable income to commercial property investors.
3. Regular rental increases provide a defence against inflation
In commercial property the most common approach to increase rents over the term of a lease are:
- Annual increases linked to changes in the Consumer Price Index (CPI), the traditional measure of inflation.
- Fixed annual increases which generally range from 2-4% p.a.
- Some landlords utilize a combination of the above.
This is not to say that rents can’t go down at the end of a lease, but these regular reviews help mitigate against inflation making commercial property a more defensive investment.
In summary, residential property investing is more speculative than commercial property investing, where the emphasis is on the stability and reliability of the income stream.
1. Effective cash yield takes into account deductions such as: agents fees, advertising, repairs and maintenance, vacancy on renewals, insurance, cleaning/damage. Source: APN models, research and external broker reports.
Before Australian Real Estate Investment Trusts (AREITs), the only way to invest in commercial property was via property syndicates (an illiquid fund holding assets for medium to long term) or purchasing commercial property outright, which for most investors was beyond their means.
The advent of the listed property trust (AREIT) sector in the 1970s changed all that. Now it’s possible to access commercial property indirectly, buying and selling small parcels of real estate much as one would an ordinary share, with minimal upfront capital commitment.
The sector has since expanded further to cover property securities funds and unlisted property trusts (also known as syndicates) each with their own pros and cons.
Let’s look at each in turn.
AREITs are trusts that own, manage and operate income producing commercial real estate (see AREITs: The Essential Guide). Listed on the Australian Securities Exchange (ASX), interests in AREITs can be traded just like shares, providing investors with exposure to a diversified, professionally managed portfolio of real estate, that has full liquidity.
There are seven major benefits of using AREITs to gain access to the commercial property sector:
- Easy to build a diverse portfolio
The AREIT sector covers everything from shopping centres and commercial office space to medical centres and warehouses. Newer specialist asset types such as childcare, hotels, storage and service stations have also emerged.
- Simple to buy and sell
Investing in AREITs is as easy as trading ordinary shares, and just as cost effective. And because there’s a liquid market for most securities you can buy and sell when you want.
- Low entry costs
Compared to the large capital commitment required when directly purchasing a commercial property investment, buying AREITs requires only a small capital outlay – as little as the minimum parcel of securities required by your broker in fact.
- High yields
Due to their trust structure, AREITs generally pay out a higher percentage of earnings as distributions than ordinary shares do. They also tend to offer a more dependable, higher yield than that usually available from residential property.
- Management expertise
Each AREIT is managed by a team of specialist property and investment experts, focused on maximising rental returns and long term sustainable capital growth for their investors.
- Capital growth
Growth is generally consistent with inflation over the medium to long term, adding to AREITs’ defensive qualities.
In short, AREITs are easy to access, require little up-front investment and the sector is large enough for you to build a diversified portfolio.
As for the risks, these rest largely with the investor. As with ordinary shares, AREITs can sometimes be relatively cheap and at other periods over-priced. There are risks that you buy and sell at the wrong time.
Then there’s the need for diversification, across the various sectors and geographies. Building a sensible, high-performing portfolio of AREITs requires similar skills to building a portfolio of listed shares. You may not have the time or inclination to acquire those skills.
Finally, there’s the risk that every self-directed investor takes; whilst acquiring sophisticated analytical skills is one thing, applying them successfully at a time of high emotion is quite another.
It’s for these reasons that many AREIT investors decide to pay expert professionals to develop and manage a portfolio of AREITs, focused on achieving clear investment objectives on their behalf, which brings us to the second way of gaining access to the sector.
2. Property securities funds
You may have heard of managed funds, where an investor purchases units in a fund consisting of a portfolio of shares, professionally managed by a team of experts in the field. Property securities funds are much the same thing, except they specialise in investing int AREITs rather than ordinary listed companies.
Property securities funds are managed funds consisting of underlying investments in AREITs, which are listed on the ASX. Either directly or via a property securities fund both options allow investors to gain access to some of Australia’s highest quality, professionally managed commercial real estate without the need for large amounts of upfront capital.
There are five distinct advantages to using property securities funds to develop your commercial property portfolio:
- Expert management
Whether you invest in a listed or unlisted property securities fund, you are outsourcing the investment decision-making to a team of commercial property experts. It is their job, using detailed valuation processes, to determine which investments to buy, hold and sell in order to generate the best returns for their investors, leaving you free to get on with your life.
- Built-in diversification
Because your portfolio is professionally managed, you have exposure across sectors, properties, locations, tenants and property managers. Such diversification is greater than many of us might achieve by investing in a single property or AREIT ourselves.
- Easy entry and exit
Unlike directly held commercial property, units in real estate securities funds are generally quite liquid. Unitholders can usually redeem some or all of their investments within a matter of days.
- Simple administration
Building an AREIT portfolio yourself requires lots of paperwork and administration. Investing through a property securities fund removes that hassle. Although you may own small slices of many different properties, you’ll only receive consolidated statements, making tax time easy.
- Minimal time and effort
Because a property securities fund is professionally managed, you don’t have to worry about how individual properties in your portfolio are performing. All decision making is taken care of, leaving you free to enjoy the income stream plus the potential capital growth from the underlying properties.
Of course, these benefits come at a cost. As with ordinary managed funds, most property securities funds charge a percentage based fee of funds under management.
The APN AREIT Fund, for example, charges a total fee of 0.85%. Fees for property securities funds generally range from 0.40-2.0% and some funds may also charge performance and other fees, which will obviously detract from total returns.
That’s the price of an easy life. Plus, if you choose your fund wisely, a level of performance you might not get yourself.
If a property securities fund doesn’t sound like your thing but you don’t want to establish and manage your own commercial property portfolio, there’s one final option for you to consider.
3. Unlisted property trusts (also known as a syndicate)
Unlisted property trusts (UPTs) are similar to property securities funds in that they allow you to access a slice of a commercial property or a portfolio of properties with relatively little capital outlay, fully supported by a professional property management team.
The big difference is that when you invest in this structure you are only one step removed from direct ownership. That gives you a higher degree of visibility and financial involvement in the properties themselves.
In many cases you can visit the building(s), monitor the performance of corporate tenants and track performance, delivered via transparent unit pricing and regular valuations provided by the UPT management. Although the day-to-day building operations and asset management rests with the UPT management team, investors receive a share of the rental income (generally quarterly) and ultimately, the proceeds when the property is sold.
Unlike listed AREITs and ASX-listed shares, UPT pricing reflects the true value of the underlying assets based on independent valuations. But it’s important to note that unlike AREITs and many real estate security funds, unlisted property trusts are generally illiquid. That means your funds are locked in for the term of the fund, which typically are five years or more. They will also lack the asset/tenant diversification of AREITs and property securities funds, and may have inferior assets and management.
Hopefully, at the end of the term, the property/portfolio will have increased or at least maintained its value. But there is a risk that the value declines, leading to potentially significant capital losses.
Whilst the manager could choose not to sell the property in this instance and trigger a capital loss, that would result in you not being able to access your funds at the end of the fund term. In this case, the term of the fund may be further extended.
In the end, it’s horses for courses. Most investors opt for an AREIT portfolio, either managed themselves or through a fund manager like APN Property Group. Syndicates and property securities funds tend to be preferred by more experienced investors and those willing to sacrifice the benefits of liquidity.
Note: an option not addressed in this article is the Hybrid Property Securities Funds which by definition mean funds that invest in a portfolio of listed and unlisted property securities.