How to invest in property without direct property ownership

2020 was a big year for the property market.

When the COVID-19 pandemic hit, property values, like many investment options, were predicted to plummet by 10 to 30 per cent. Not only did the property sector defy these predictions and resiliently return to pre-COVID levels, but buyer demand is predicted to reach near record-high levels into 2021. 

With the aid of low-interest rates, government incentives, economic stimulus, and a shortage of rental accommodation, it’s no wonder interest in property investment options is high.  

However, direct property investment isn’t something you should jump into without significant consideration. 

From choosing the property and organising its ongoing management, to tax implications and covering out-of-pocket expenses, property investing is both intricate and involved – perhaps more so than a first time Australian property investor anticipates. 

What if there was a way to earn competitive returns on property without direct property ownership?

There is – and they’re called unlisted property trusts.

What is an unlisted property trust? 

Professionally managed property trusts provide investors with an alternate way to invest in property without the hassle associated with direct property investment. 

In property trusts, investors pool their money by purchasing ‘units’ in the property trust.

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. Then, the Trust aims to distribute this income to investors via regular payments called ‘distributions’.  

In unlisted property trusts, your initial capital remains in the Trust and cannot be withdrawn until the property is sold or a withdrawal offer is made by the Responsible Entity. At the end of the investment term, the property is sold and any profits are distributed on a pro-rata basis, depending on the unit holdings of investors. However, distributions are not guaranteed, nor is the return of initial capital invested.  

Learn about the difference between Listed and Unlisted Property Trusts.  

What are the potential benefits of investing in an unlisted property trust? 

Unlisted 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: 

1. Income 

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 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 on your own.  

3. Diversification

While direct property investment restricts you to the highs or lows of a single property, many property trusts have several properties within their portfolios. This allows for a critical level of diversification that you may not have been able to achieve on your own. Learn more about the importance of diversification. 

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 have increased upon sale after relevant establishment costs and expenses have been accounted for. If they have decreased, it may result in a capital loss. 

5. Professional management 

As an everyday investor, it can be hard to know what to look for in a property – and it’s an investment you don’t want to get wrong.  

Property trusts are managed by a professional fund manager, which leverages their expertise in investment and property to source and acquire properties that meet the trust’s investment and risk management criteria.

After the property is acquired, all components of managing the investment, such as maintenance, administration, rent and unexpected expenses, are managed by the fund manager – so you won’t have to. 

Key factors to consider when investing in a property trust 

However, 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.  

1. Management 

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.  

Trilogy leverages more than 20 years of experience in property to effectively evaluate investment options for our unlisted property trusts based on location, size, lease terms, tenant quality and longer-term business and social trends.  

2. Property Type 

The class of property a trust holds, such as residential, commercial, office or industrial, can significantly affect its performance. 

This is because different property types are exposed to different demand, market and economic trends, risk, lease terms, liquidity and investment goals. 

It’s important you ensure the property types included in the trust’s portfolio align with your personal circumstances and investment goals. 

3. Tenants 

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 contractually secured for a greater time period.  

Trilogy places significant emphasis on the selection of properties and tenants that meet these criteria. We are always looking at least 12 to 18 months ahead when we’re in dialogue with our tenants with the aim of securing and maintaining a high level of tenancy in each property.
 

4. Liquidity 

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. 

Trilogy’s unlisted property trusts generally have fixed terms of five to six years. This longer-term approach aims to allows investors to benefit from the increase in the income as a result of annual rent reviews and the potential for capital growth throughout the property cycle. 

5. Gearing

Most property trusts are geared – which means they borrow to buy. To purchase properties, some capital is raised from investors with the remainder financed via debt, secured by 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 more susceptible to downturns in the economy and the property cycle.  

The global factors that drive borrowing costs are notoriously difficult to forecast, so Trilogy takes a conservative approach to gearing. 

Our property trusts are generally geared between 40-50%, sometimes with interest rate protection instruments, and we have provisions for re-valuation set out in the offer document and in the constitution governing each trust. 

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.  

Trilogy’s current property trust portfolio 

We manage several unlisted property trusts that are designed to suit investors seeking a long-term investment, regular income and the opportunity for capital growth. Our current range of property trusts is below: 

Learn about the Trilogy Industrial Property Trust and Trilogy’s single asset property trusts  >