Traditionally, when you think of owning property, your mind likely turns to owning a home or residential investment property directly – the Australian dream. However, when it comes to funding the three phases of retirement, there are various types of property investments that can help strike the balance between income, capital preservation and capital growth.
Types of property
Property is an asset class that is separated into two groups – residential and commercial. Residential property can include an investors’ own home or homes, as well as investment properties. This category is often further split into units and houses.
Commercial property includes retail, office, industrial and specialty subsectors. Each of these commercial subsectors possess unique risks and portfolio implications.
For example, the rise of e-commerce has impacted both the retail and industrial sectors in different ways. Brick and mortar retailers, particularly those selling largely discretionary items, have experienced increasing competition from online sellers. However, investors are flocking to warehouses, fulfilment centres and distribution centres in response to the e-commerce boom, as these facilities play a more important role than ever in delivering customers their goods (and quickly!).
Methods of investing in property
There are multiple ways an investor can gain exposure to property.
Purchasing a property yourself
Directly purchasing a property is possibly the most common approach to residential property investment.
This strategy may be applied in the commercial property space, but it’s typically only possible for most investors to acquire small industrial units or other lower priced investments. Building a diversified portfolio of commercial assets or investing in a large industrial, retail or office asset is unrealistic for most investors using this direct ownership strategy.
Listed property funds
Australian real estate investment trusts (A-REITs), also known as listed property funds, are professionally managed vehicles which pool investor funds and invest that money into property. Theoretically, a real estate trust could invest in a single large asset, but these trusts often hold a portfolio of real estate assets, therefore offering greater diversification compared to owning a property directly.
Because they are traded on the Australian Securities Exchange, units (or shares) in A-REITs are traded like any other share. To invest, an individual simply purchases shares in a trust via the exchange. To redeem investments, an individual simply sells shares in the trust via the exchange. This means A-REITs offer a high level of liquidity.
However, this also means the share price of an A-REIT is susceptible to market volatility and further, the market price of shares in an A-REIT may not necessarily reflect the underlying value of the property assets it holds.
Unlisted property funds
Like A-REITs, unlisted property funds are professionally managed vehicles which pool investor funds and invest that money into property. They can also invest in one large, single asset, but also often hold a portfolio of real estate assets, therefore offering greater diversification compared to owning a property directly. The key difference between unlisted property funds and A-REITs is as the name suggests, unlisted property funds are not listed on any stock exchanges.
The value of an investment in an unlisted property fund is influenced primarily by the value of the underlying assets and is not influenced by share market volatility the same way A-REITs can be influenced.
There are two main types of unlisted property investment vehicle – an open-ended fund and a closed-ended, fixed term trust.
Open-end funds have no maturity date or specified number of units. Units can be issued as money continues to flow into the fund, which is then used to purchase additional properties. A manager may make funds available for withdrawal periodically, but this type of investment is not as liquid as listed securities, which can be bought and sold on the exchange.
Fixed-term, closed-end trusts contain one or more assets that will be held for a specified amount of time, known as a term. These types of investment are illiquid, as the expectation is that an investor will see out the term of the trust.
Benefits of investing in property
If an investor had $50,000 to invest in property, what could they achieve? While not advice, the following demonstrates the benefits and drawbacks of a hypothetical investment in listed property, unlisted property, and owning a property outright.
Diversification
Diversification is a key benefit across both listed and unlisted property investments. Typically, fund managers seek diversification across location, tenant profile and asset type. While single asset trusts typically don’t provide diversification on their own, investment starts at as little as $10,000, meaning investors can diversify across funds and managers.
Owning a property outright for $50,000 is not feasible in most markets, and therefore, diversifying across multiple directly held assets is likely impossible with this amount of capital.
Regular income
Regular income is a key trait of all types of property investment, but is generated in slightly different ways.
Direct property ownership and investments in unlisted property funds derive their income from rent paid by tenants. A-REITs also generate income from rent paid by tenants and as they are listed investments, they are required to distribute at least 90% of their net taxable income to shareholders.
Capital growth potential
Investing for capital growth in retirement is an important consideration for investors. The capital growth potential across different types of property investments varies, and it is important to note that where assets have the potential for capital growth, they also have the potential for capital loss.
Both listed and direct property (as well as listed shares) are the most sought-after investments for capital growth.
Other considerations
It’s important to note that while various forms of property have a lot to offer a retirement portfolio, there are also drawbacks. Property is still just one asset class, and a diversified portfolio should contain many.
Residential and unlisted property pay distributions through rental income from one or more leases. Rent paid by tenants, while reasonably stable, can vary as market demand and supply dynamics change in property sub-sectors. Finally, just as there is the potential for capital growth, there is also the potential for capital loss.
It’s also important to note that there are other ways to gain exposure to property that offer different mixes of the above traits. Some alternative income strategies and private credit strategies seek to preserve capital while delivering a consistent income stream.
If you’d like to know more about any of the topics mentioned in this article or investment opportunities more broadly please contact our Investor Relations team on 1800 230 099 or investorrelations@trilogyfunds.com.au.
This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) and 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 Product Disclosure Statement (PDS). The PDS and the Target Market Determination (TMD) issued by Trilogy Funds and available at www.trilogyfunds.com.au. All investments, including those with Trilogy Funds, involve risk which can lead to no or lower than expected returns, or a loss of part or all of your capital. See PDS and TMD for details. Investments with Trilogy Funds are not bank deposits and are not government guaranteed. Past performance is not a reliable indicator of future performance.
