Difference between REITs and Real Estate Funds
This article sheds light on two common investment vehicles in the real estate market: Real Estate Investment Trusts (REITs) and Real Estate Funds. REITs are traded on stock exchanges and primarily invest in income-generating real estate, offering a high dividend payout that appeals to income-focused investors. On the other hand, real estate funds focus on capital appreciation, making them appealing to long-term investors. The article compares these investment options with their Australian counterparts, Australian REITs (A-REITs) and Australian Real Estate Funds, highlighting the differences in liquidity, income generation, diversification, and tax considerations.
Real Estate Investment Trusts in Australia are referred to as Australian Real Estate Investment Trusts (A-REITs). These are trusts that predominantly invest in income-generating real estate, encompassing commercial spaces, shopping centres, and even industrial properties.
Similar to their global counterparts, A-REITs can be traded on major stock exchanges, primarily the Australian Securities Exchange (ASX). This provides the advantage of liquidity, as investors can easily buy or sell units based on market demand.
A-REITs can be categorised as either listed or unlisted:
Listed A-REITs are publicly traded on the ASX, offering transparency and liquidity. Their performance is accessible to the public, and they’re subject to rigorous regulatory oversight.
Unlisted A-REITs are not publicly traded, meaning they don’t offer the same level of liquidity as listed trusts. They may be suitable for investors with a longer investment horizon, willing to trade immediate liquidity for potentially higher returns.
To avail of tax concessions, A-REITs typically distribute the majority of their taxable income to investors. This often translates to attractive yields, especially in a low rental vacancy environment like Australia.
Australian Real Estate Funds pool resources from multiple investors to invest in a diversified portfolio of real estate assets or securities. Depending on the fund’s focus, it might invest in commercial properties, residential projects, or a mix of both.
The primary allure of Real Estate Funds in Australia is capital appreciation, coupled with some income distribution. These funds, depending on their structure, might also provide tax benefits and tax deferrals, especially if they focus on long-term holdings and capital gains.
Which is Right for You?
Choosing between A-REITs and Real Estate Funds in the Australian context depends on several factors:
Income vs. Growth: If regular income distributions appeal to you, especially with the backdrop of increasing interest rates and inflation, Mortgage A-REITs might be more fitting. However, if you’re after capital appreciation, Real Estate Funds or Equity A-REITs can be more enticing.
Liquidity Concerns: Listed A-REITs, being traded on the ASX, provide superior liquidity. In contrast, unlisted A-REITs and many Real Estate Funds may not be as liquid, necessitating a longer investment horizon.
Diversification: Both investment vehicles offer diversification. A-REITs can be sector-specific or diversified across property types and regions. Real Estate Funds can offer a blend, investing in both physical properties and real estate securities.
Tax Considerations: Tax implications can vary. A-REIT distributions are often a mix of income and capital returns, each component having different tax treatments. Real Estate Funds and Equity A-REITs might offer concessional capital gains tax rates on long-term holdings.
Whether you lean towards A-REITs or Real Estate Funds, it’s crucial to align your choice with your financial goals, risk appetite, and investment horizon.
Two prominent Australian property investment vehicles are the Trilogy Industrial Property Trust (Industrial Trust) and the Trilogy Monthly Income Trust (Trust).
Trilogy Industrial Property Trust (Industrial Trust)
The Trilogy Industrial Property Trust is an unlisted Equity A-REIT that focuses on industrial properties. This sector has seen a surge in demand, primarily driven by the rise of e-commerce, logistics, and the need for warehousing and distribution hubs. The key features of the Industrial Trust are:
Focused Investment: The Industrial Trust primarily invests in strategically located industrial properties, ensuring optimal returns from a sector that has shown consistent growth.
Regular Distributions: In line with the typical Equity A-REIT model, the Trilogy Industrial Property Trust aims to provide investors with regular income distributions. This makes it an attractive option for those seeking consistent returns. In addition to this, investors may also gain on property revaluations and tax-deferred distributions.
Active Value Enhancement: The Industrial Trust’s proactive approach to property management means there is always the potential for value enhancement. This can come in the form of refurbishment, repositioning, or redevelopment, which can help to increase rental income and capital appreciation.
Unlisted Advantage: Being unlisted, this trust may offer the potential for higher returns compared to its listed counterparts.
Trilogy Monthly Income Trust (Trust)
The Trilogy Monthly Income Trust is a Mortgage A-REIT that primarily invests in mortgages or mortgage-backed securities rather than direct property. The focus is on markets that are overlooked by the banks. This allows the Trust to generate superior interest income at more acceptable levels of risk than would be possible in more highly contested markets. The Trust has a consistent track record, winning a “Very Strong” rating from independent researcher Foresight Analytics. Below are the highlights of the Trust:
Diverse Loan Portfolio: The Trust’s investments span a variety of short-term development loans, involving residential, commercial, and industrial projects. This diversification can mitigate risks associated with any single sector’s downturn.
Monthly Distributions: For 16 years The Trilogy Monthly Income Trust has paid investors a distribution every single month while keeping the unit price fixed at a dollar. This can be particularly appealing for those seeking a regular income stream.
Risk Management: The Trust keeps loan terms short (2 years or less) which enables greater control over portfolio cashflows than longer-term loans. Finance is extended in tranches, only after favourable reports from independent quantity surveyors. Trilogy has real, demonstrable expertise in the sectors it lends to – property development and construction – which allows the Trust to step in and collaborate with borrowers to maximise value from projects where appropriate. All the loans in the Trust portfolio are 100% backed by first-registered mortgages with a maximum LVR of 70%.
Aside from direct ownership of investment property, there are two main options to consider: REITs and Real Estate Funds. Each has its unique advantages and considerations. Listed REITs offer liquidity and regular income distributions, unlisted Mortgage REITs offer potentially higher returns and a natural hedge against higher interest rates, while Real Estate Funds and unlisted Equity REITs have the potential for capital appreciation and potential tax benefits. Among the available options in Australia, the Trilogy Industrial Property Trust and Trilogy Monthly Income Trust are two standout investment vehicles, each with its distinct focus and benefits. To make informed decisions and take advantage of the potential of the real estate market, it’s crucial to conduct thorough research, consider your financial goals, and, if necessary, consult with financial professionals.
This <<medium>> is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) as responsible entity for the management investment schemes mentioned in this <<medium>>. Application for investment can only be made on the application form accompanying the relevant Product Disclosure Statement (PDS) and by considering the Target Market Determination (TMD) available at www.trilogyfunds.com.au. The PDS contain full details of the terms and conditions of investment and should be read in full, particularly the risk section prior to lodging any application or making a further investment, together with the TMD. 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. Trilogy Funds is licensed to provide only general financial product advice about its products and therefore recommends you seek personal advice on the suitability of this investment to your objectives, financial situation and needs from a licensed financial adviser. Investments with Trilogy are not bank deposits and are not government guaranteed. Past performance is not a reliable indicator of future performance.