Are you a savvy investor? Or maybe you’ve just purchased your first share? Either way, you may have heard of something called an Unlisted Property Trust.
A professionally managed Unlisted Property Trust (also known as a scheme, fund or syndicate) is an alternative way to get started or diversify when it comes to investing in property.
We’ve answered the top six most common questions that we get surrounding Unlisted Property Trusts so you can not only learn how they can contribute as an additional source of cash flow, but decide if it’s an investment prospect fit for you. Remember, with any investment decision, we advise that you seek independent financial advice on your current circumstances and capacity for financial commitment. The following is general advice and information only.
1. How does an Unlisted Property Trust work?
When you’re buying into an Unlisted Property Trust, you buy a ‘unit’ in a Trust that holds investment property (or properties) which may be managed by a professional investment manager. This means you’re purely an investor in units and you won’t have to take care of the direct day to day components of your investment such as property management.
The initial capital you invest in units stays within the assets you have invested in until the asset is sold and the value of these units may go up and down. Once sold, the Trust will generally terminate and any profits are distributed among all investors according to their unit holdings. During the life of your investment, you may also have the right to receive income, generally paid monthly.
2. What is the benefit of investing in an Unlisted Property Trust?
As an investor in an Unlisted Property Trust, you have the right to receive regular income from the property during the life of the Trust. A secondary aim is to achieve a capital gain on your original investment. As with other investments, any capital gains are only realised if the assets have increased in value after the sale of the investment and any associated fees and costs are subtracted.
3. How is cash flow generated?
In most cases, cash flow is achieved by the collection of rent from long-term leases to tenants. Most property trusts aim for annual rent increases, which work to provide growth in rental income and overall property value. Further to this, depreciation may result in a portion of income being tax-deferred. At the end of the investment term, ideally the asset is sold, and any profits are distributed on a pro-rata basis, depending on the unit holdings of investors.
Alternatively, if the property trust is open-ended, meaning it has no fixed duration or end date, the Responsible Entity will most likely aim to make pro-rata withdrawal offers at certain times during the life of the Trust, for example every four years. This allows investors to exit the investment based on the terms of the offer. However, as property is generally an illiquid investment class, the Responsible Entity will need to consider and disclose how to fund such offers.
4. What are the risks of investing in an Unlisted Property Trust?
Like all investments, there are going to be risks. While you may receive distributions and capital gains, you also may not, depending on the performance of the property investment asset. A licensed adviser can help you make a balanced judgement if you have any questions about the suitability of this type of property investment for your personal circumstances and needs.
5. Why is called an unlisted trust?
A listed property trust is registered on a market or exchange, such as on the Australian Securities Exchange (ASX) while an unlisted trust is not. One thing to note is that withdrawing from a listed trust is usually fairly straightforward, and you can do so at a time of your choosing. An unlisted property trust requires that your initial capital remains in the property and cannot be withdrawn until the property is sold or a withdrawal offer is made by the Responsible Entity.
6. How are the investments chosen and managed?
The properties for investment are selected by the fund manager and in most cases their experienced property acquisition team against specific selection criteria. Components of managing a property, such as maintenance, administration and rent are all managed by the fund manager or property manager, which means you don’t have to worry about being a landlord, just an investor.
Unlisted Property Trusts can be an effective way to make your mark in property and provide the opportunity for long term cash flow. Check out what to look for before investing your next Unlisted Property Trust or learn more about property trust investment opportunities, offered by Trilogy.