Property prices are at record highs, and so is buyer interest. First-time home buyers are taking out new mortgages at the fastest rate in more than a decade and savvy property investors are hot on their heels, encouraged by record low interest rates, pent-up demand and a resurgence in consumer confidence in the wake of the COVID-19 pandemic.
Despite a brief period of price weakness during the worst of the global health crisis in mid to late 2020, Australian house values actually finished the year 3% up, and the experts are tipping even stronger performance from the property market for this year and beyond. UBS Bank, for example, says property prices could experience an “up crash” of over 10% p.a.
Property is a popular investment because it is something we can see, touch and easily understand. Ironically, however, buying an investment property can be extremely complex as it involves weighing up factors such as rates of return, capital growth projections, maintenance and borrowing costs, negative gearing and other tax considerations.
Buying a house, unit or vacant land directly has other drawbacks too: it is a costly exercise thanks to fees, duties and charges, requires substantial upfront savings for a deposit, and can be very time-consuming when it comes to managing rental properties. Plus, investing in a single property means all your eggs are in one basket, increasing your investment risk.
The good news is there are other options to participate in the property market without directly buying one that can make property investing quicker, cheaper and easier, while still allowing investors to share in the competitive returns that property can offer. Below we explore some of the property-based investment options available.
Property-based investment options
Mortgage trusts are a very popular property-based investment option with Aussie investors, who have more than $15 billion invested in this type of product. When you invest in a mortgage trust, your money is managed by professional fund managers and lent to borrowers such as property developers in exchange for registered first mortgages over property as security. In return, the trust aims to provide you with a regular income called a distribution, which is based on returns from the trust’s loans, cash, and any other investments it holds, net of fees.
You can commit the minimum investment amount, which can be as little as $10,000 and are allocated a number of units in the trust based on how much you invest.
It is important to understand the redemption terms and conditions outlined within the mortgage fund’s offer document and consider, with a licensed financial adviser, your budget and need for access to your money before making an investment decision
Your distribution may be paid on a monthly, quarterly or annual basis, and you’ll generally be given the option to either withdraw it to help finance your lifestyle or reinvest it. You should note that distribution rates are usually variable and not guaranteed.
Mortgages trusts may be either pooled or contributory. In a pooled mortgage trust, your money is pooled with that of other investors to invest in a portfolio, or pool, consisting of several different loans. The advantage of this is that the risks associated with each individual loan are spread across many investors.
In the case of a contributory mortgage trust, you, or the fund manager, choose a single loan to invest in. While this style of mortgage trust allows you to pick which borrower to invest in, it can carry a higher risk because your investment is concentrated in one mortgage loan.
Property trusts – also known as property syndicates – are a property-based investment option that give you an opportunity to invest in properties that may not otherwise be readily available to you, such as industrial or commercial buildings.
You buy units in a trust which owns the property or properties. The trust is managed by a professional fund manager, who takes care of all admin tasks such as property maintenance, paperwork and the collection of rents.
Like mortgage funds, property trusts aim to pay you a distribution at regular intervals (e.g. monthly or quarterly). However property trusts also offer the opportunity for capital growth over the long term.
There are many different types of property trust to choose from. For example, listed property trusts are registered on a market or exchange, such as on the Australian Securities Exchange (ASX), and their units can be bought and sold like shares. Unlisted property trusts tend to be less volatile and more closely follow the property market than listed trusts, but they require that your initial capital remains in the trust until the property is sold, or a withdrawal offer is made by the fund manager.
There are many other property-based investment options for investing in property indirectly, each with their own pros and cons. Real estate ETFs and shares in property-focused companies, for example, can move up or down along with property prices and/or the share market itself, while options such as peer-to-peer property lending platforms are bringing new investment opportunities to market.
As with all investments, there are risks as well as potential rewards associated with investing in property. A licensed financial adviser can help you better understand the pros and cons of different investment types. We always recommend investors obtain, read and understand the relevant offer documents and seek advice from a licensed financial adviser before investing.
At Trilogy, we specialise in managing mortgage trusts, property trusts and diversified income funds that all share the common goal of providing income-focused solutions designed to help investors achieve their financial goals.
This article has been prepared by Trilogy Funds Management Limited ACN 080 383 679 AFSL 261425 (Trilogy) and does not take into account your objectives, personal circumstances or needs, nor is it an offer of securities. Investments in Trilogy’s products are only available through the relevant PDS issued by Trilogy and available at www.trilogyfunds.com.au. All investments, including those with Trilogy, involve risk which can lead to loss of part or all of your capital or diminished returns. Investments with Trilogy are not bank deposits and are not government guaranteed.