The what and why of investing in property trusts
In the current low-rate environment, many investors have turned to property in the chase for more competitive returns. With the aid of low-interest rates, government incentives, economic stimulus, and a shortage of rental accommodation, it’s no wonder why, with several property sectors experiencing record-breaking growth.
If you’re looking to earn competitive returns on property, but don’t want the responsibility of direct ownership, a property trust could be an investment option for you.
We’ve put together a list of key things to consider, including why a property trust could suit your investment portfolio.
What is a property trust?
Property trusts, also called property funds or property syndicates, provide investors with an alternative way to invest in or hold part ownership of property without having to make a direct purchase.
In property trusts, investors buy units in the trust, which owns a property or properties. The trust, managed by a professional fund manager like Trilogy Funds, will purchase property assets with the aim of earning income from the trust’s investments. The Trust then aims to distribute this income to investors via regular payments called distributions.
Listed vs. unlisted property trusts – what’s the difference?
There are two main types of property trusts – listed and unlisted. Below are typical characteristics of these two types of property trusts:
|Listed property trusts||Unlisted property trusts|
|Publicly listed on the Australian Securities Exchange (ASX)||Not listed on the Australian Securities Exchange.|
|Investors can easily buy into and sell out of listed property trusts.||
Capital may be locked in for duration of trust, with potential for capital growth.
|Unit price imitates the share market.||Unit price imitates the property market.|
Listed property trusts
Listed property trusts are publicly listed on the Australian Securities Exchange (ASX).
While this generally provides the benefit of high liquidity as investors can buy and sell securities as they choose, this also creates a possible divergence in the net asset value of the trust and the trading price of the Trust on the ASX.
Unlisted property trusts
Unlisted property trusts are, by nature of the description, not listed.
In unlisted property trusts, your initial capital remains in the trust and depending on the type of the trust, may not be able to be withdrawn until the property is sold or a withdrawal offer is made by the trustee.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 are distributed on a pro-rata basis, depending on the unit holdings of investors.
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:
Most property trusts are designed to provide investors with regular distribution income from the property during the life of a trust. However, distributions are not guaranteed, nor is the return of initial capital invested.
2. Access to the property sector
By pooling your money with hundreds of other investors in a property trust, you can often gain access to different property sectors without the significant upfront capital that would have been required had you purchased the property or properties on your own.
Many property trusts have several properties within their portfolio. This allows for a critical level of diversification that you may not have been able to achieve on your own.
4. Opportunity for capital growth
Investors in unlisted property trusts may also receive a capital gain on their original investment. This will only occur if the value of the assets in the trust net of fees has increased upon sale. If they have decreased, it may result in a capital loss.
5. Professional management
Property trusts are managed by a professional fund manager, which leverages its expertise in investment and property to source and acquire properties that meet the trust’s investment and risk management criteria. After a property is acquired, all components of managing the investment, such as maintenance, administration, rent and unexpected expenses, are managed by the fund manager.
Key factors to consider
Not all property trusts are the same and it’s important to evaluate key features of any trust before deciding to invest to determine if it meets the objectives of your portfolio. Below, we discuss five features to consider when looking to invest in a property trust.
A strong investment manager underpins the success of any trust as the decisions made by the manager will impact how the investors’ money is used to generate returns. Strong fund managers should have experience in and an in-depth understanding of property to make calculated investment decisions in your best interest and demonstrate proactive risk management that aligns with your tolerance for risk.
2. Property type
The class of property a trust holds (such as residential, commercial, office or industrial) can significantly affect its performance. This is due to different property classes being exposed to different demand, market and economic trends, risk, lease terms, liquidity and investment goals. 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. Certain trusts may preclude withdrawals for up to 10 years. While it’s important to look for competitive returns, having your cash locked away for 10 years may not suit your personal circumstances or financial capacity. It’s important you always take your cash-at-call requirements into consideration when planning to invest in a property trust and understand the timeframes of the trust you are investing in.
Most property trusts are geared – which means they borrow to buy. To purchase properties, some capital is raised from investors with the remainder funded via debt, often secured by one or more mortgages over the properties. As a rule of thumb, higher gearing ratios 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.
We recommend that you seek independent financial advice and read the trust’s offer document to ensure these factors align with your personal portfolio, financial goals and risk tolerance.
*Please note, Trilogy Funds is not able to provide you with tax or financial advice and we recommend you seek an independent professional consultation about the taxation treatment of your investment when completing your tax return.
This article by Trilogy Funds Management Limited ABN 59 080 383 679 (Trilogy Funds) does not take into account your objectives, personal circumstances or needs, nor is it an offer of securities. Investments in Trilogy Funds products are only available through the relevant PDS issued by Trilogy Funds and available at www.trilogyfunds.com.au. All investments, including those with Trilogy Funds, involve risk which can lead to loss of part or all of your capital or diminished returns. Investments with Trilogy Funds are not bank deposits and are not government guaranteed.