What you need to know about unlisted property trusts
As well as the practical financial benefits, they also offer pride of ownership, which you can enjoy whenever you drive past a building owned by your trust.
Unlisted property trusts provide an investment that is similar to buying a commercial property directly, with the added benefit of professional management.
What are unlisted property trusts?
An unlisted property trust, also called a fund or syndicate, is an investment where you buy “units’’ in the trust, which is run by a professional investment manager.
The manager pools your money with that of other investors and invests it in one or more large property assets, such as a shopping centre, office building, or warehouse.
The manager is responsible for maintaining the asset, administration, collecting rents and any improvements.
Some unlisted property trusts are formed to develop a major building, such as an office park, on a greenfields site.
Property trusts have different rules, but they usually offer a regular distribution, paid quarterly or half-yearly, that is comprised of rents from the building's tenants.
If the value of the trust’s property increases, you will receive a capital gain, however, you are also exposed to the risk that the building may decrease in value.
There are two main types of unlisted property trusts:
1. Open-ended property trusts
Open-end funds do not mature at a predetermined date, and they don’t have a limited number of units. Instead, they can keep raising money and using it to buy additional properties.
When an investor wants to exit, they will either be paid out with cash from the trust or with money from new investors.
These funds usually have multiple assets to increase diversification. The manager decides whether the fund should buy or sell assets, so investors do not have certainty over the exact properties they will own.
2. Fixed-term, closed-end property trusts (syndicates)
Syndicates own one or more properties that will be held for a predetermined time, usually five to ten years.
At the end of the period, investors will vote on the future of the trust. Usually, the property will be sold, the trust wound up, and investors paid out.
Syndicates are illiquid investments so you should anticipate staying in the trust for the full investment term.
Syndicates are a close proxy for the direct purchase of commercial property. They are relatively easy to understand and you know for sure which property (or properties) are going to be owned.
Pros and Cons of Unlisted Property Trusts
Pros of unlisted property trusts
- Potential for regular income
- Potential for capital gain
- Access to much larger assets than an individual could afford to buy
- Professional management of the asset
Cons of unlisted property trusts
- Lack of diversification (few assets)
- Potential for capital loss
- Relatively illiquid (harder to exit than a sharemarket-listed asset)
How should I get information about a trust?
Like most investments, the best place to seek information about an unlisted property trust is in its Product Disclosure Statement.
This will tell you:
- the product's key features
- fees and commissions you will pay
- who will be managing the trust
- benefits and risks
- the complaints handling procedure
Who regulates unlisted property trusts?
Unlisted property trusts are regulated by the Australian Securities & Investments Commission (ASIC).
Listed vs unlisted property trusts
Listed property trusts
Property trusts can also be listed on the Australian Securities Exchange (ASX), in which case they are called Australian Real Estate Investment Trusts (AREITs). Listed property trusts are open-ended, and typically own more assets than unlisted trusts, sometimes numbering into the dozens.
These trusts are:
- Valued continuously just like other stocks, so you always know what your investment is worth
- Easier to sell if you no longer want the investment, with low transaction costs
- Subject to market listing rules including continuous disclosure
- Often subject to research by broking houses so you can get independent information
Unlisted property trusts
These trusts are:
- Not listed on a public market so you can't easily see the value of your investment
- Not subject to ongoing ASX supervision
- Sometimes difficult to get out of if you want to withdraw your money early
- More similar to direct property ownership because their price is less volatile
- Typically have fewer assets, so you know what you will own and for how long
Alternatives to unlisted property trusts
Investors who want to invest in property but are put off by the risk, or maybe by the amount of money it requires, might consider a Residential Mortgage-Backed Securities (RMBS) fund.
RMBS are bonds that receive regular income from the residential mortgage repayments of Australian households.
Instead of just two or three loans, RMBS bonds typically group together hundreds if not thousands of home loans, worth hundreds of millions in total.
Just like an A-grade office tower, the only way for ordinary investors to buy these bonds is by pooling their assets through a fund.
Firstmac’s Investment Fund High Livez gives ordinary investors access to the RMBS market, which is usually restricted to professional and institutional investors. Invest as little as $10,000 with zero entry and exit fees.
Learn more about High Livez here.