REITs v Property Trusts – Managed fund comparison
Australian property trusts are popular investment vehicles and a type of managed fund that provides exposure to real estate assets including industrial, commercial, retail and healthcare properties, which may otherwise be out of reach to individuals.
Also referred to as listed and unlisted property funds, real estate investment trusts (REITs) or property syndicates, they can be a great way to diversify an investment portfolio, especially for someone seeking the opportunity for income that exposure to property can offer without all the hard work of being a landlord.
As with any investment, it always pays to do your homework and research the options available and consider how they fit within your investment portfolio. Read on to learn more about our property trust.
Property trusts are managed by professional fund managers, who pool the funds of many investors to invest in a single asset, a specific property sub-sector or a wide range of property-related assets such as residential, industrial, office buildings, shopping centres or hotels, depending on the mandate of the trust.
Investors contribute to a property trust by buying ‘units’, which they can sell when they wish to withdraw their investment.
Unlisted property trusts are subject to the rules of the trust. In the case of listed trusts, investors are able to redeem units on an exchange, such as the Australian Securities Exchange (ASX). Investing in a property trust is a more straightforward process than buying and selling property directly, which also incurs high entry and exit costs such as stamp duty, legal fees and real estate agents’ fees.
The fund managers, and/or a property management company engaged by the trust, perform the role of landlord for the portfolio, handling all day-to-day administration, property maintenance and rent collection etc.
The trusts earn income from rent and any other assets of the trust, which, after deduction of fees and other expenses is paid out to investors as regular distributions. This makes them suitable for income investing, and some property trusts also offer the potential for capital growth, in instances where the value of the property/ies held by the trust increase over time.
However, as with any investment there are risks associated with any potential return and property trust distributions are not guaranteed, nor is the return of initial capital invested. Investors should always read the relevant Product Disclosure Statement (PDS) or Information Memorandum (IM) carefully to understand all relevant risks and terms of the trust.
Australian property trusts are offered in two forms, listed or unlisted.
Listed property trusts, listed on an exchange like the ASX, are more commonly known as Australian real estate investment trusts (A-REITs) and units can be traded on the ASX.
Unlisted property trusts generally require you to apply to the trust’s Responsible Entity to invest or withdraw funds, and each trust has its own rules around how this is done.
All registered Australian property trusts are regulated by the Australian Securities & Investments Commission (ASIC), which enforces laws to protect consumers and investors. Registered property trusts can only be offered by a fund manager with an Australian Financial Securities Licence (AFSL) or required licensing.
Because A-REITs are traded on the stock market, their behaviour can be correlated to the trading sentiment of investors on the ASX, leading to a possible dislocation between the price at which an investor can acquire or dispose of the units, and the underlying volume of the units at any point in time..
Unlisted property trust units are not traded in the same way, so any changes in their value is represented in the net asset value, which is not impacted by external investor sentiment.
During 2020 and the start of the Covid pandemic, for example, the listed price on many A-REITs plummeted and many traded at a discount to their net tangible asset value, Unlisted property funds weren’t exposed to investor sentiment which could affect the trading price of these vehicles to the same degree that listed property funds were.
Listed A-REITs give investors the advantage of being able to acquire or dispose of units in the fund on a daily basis via the ASX, subject to trading volumes.
Unlisted property trusts generally have fixed investment terms and may have limited withdrawal periods, which can be a drawback for investors who need to be able to cash out at short notice. As the majority of the assets are often tied up in real estate properties which aren’t readily saleable, withdrawals may only be possible at set intervals as outlined in the relevant PDS or IM.
If you only have a small amount to invest, it is possible to buy into an A-REIT for as little as $500.
Unlisted property trusts typically require much higher minimum investments.
These may range from $10,000 up to $250,000 or more, and some unlisted property trusts are only available to those who qualify as sophisticated or wholesale investors.
Investing in a listed A-REITs may incur transaction costs such as broker’s fees, in the same way that there are costs to acquire or dispose of shares on the ASX.
Unlisted property trusts may or may not charge entry and exit fees, and some withdrawals may incur a buy-sell spread.
Whether you choose a listed A-REIT or an unlisted property trust, it is very important to read the fund’s PDS before investing. This will explain the features of the trust and its underlying assets, and provide important information about the risks of investing. Key factors to look for include:
Generally speaking, the more diverse the property assets of the trust, the lower the potential impact of the specific returns and value of one property on the overall trust. Diversification by location, tenant sector, asset type and lease expiry dates (referred to as Weighted Average Lease Expiry, or WALE) should be considered.
Consider also whether the trust is open or closed. Open-ended property trusts often own multiple properties and can keep raising money to buy more. Closed property trusts may have less diverse portfolios and hold one or a few properties. They are less liquid as new capital is generally only raised to acquire additional properties and withdrawals may only be possible if the property or properties are sold.
Gearing refers to what the property trust owes (its debts) vs what it owns (its assets). Look for the fund manager’s policy on gearing in the PDS. Property trusts with lower borrowings have a different risk profile than those which are aggressively geared.
Fund managers earn fees for their services in line with the trust’s PDS. More effective fund managers aim to create and add value to the trust for the benefit of investors. Check the PDS to satisfy yourself as to the qualifications and experience of the trust’s managers, as well as the fees they charge for their services.
To learn more about the risk factors of investing in property trusts, visit ASIC’s Moneysmart website.
The Trilogy Industrial Property Trust (Industrial Trust) is an example of an Australian unlisted property trust designed to provide competitive income as well as the opportunity for capital growth over the long term
This open-ended trust invests in industrial property located in key Australian regional and metropolitan industrial precincts, which has been one of the most sought-after asset classes in recent years.
The Industrial Trust’s portfolio currently consists of 16 properties across Queensland, New South Wales, Victoria, South Australia and the Northern Territory.