If you’re searching for a means to diversity your investment portfolio, a property trust may be worth your consideration.
A property trust is a type of managed fund that affords investors the opportunity to invest in a range of real estate assets including residential homes, commercial buildings, industrial warehouses, hotels, shopping centres, hospitals and other specialist properties. They are overseen by a fund manager who combines the funds of several investors in order to purchase a particular property or a group of property assets.
As an investor, you will contribute to a property trust by purchasing a ‘unit’ or ‘units’, which you can then on-sell if you decide to withdraw from the trust. If a property is worth $5 million and is divided into five units, each unit will cost $1 million. If you purchase two units, you will own 40% of the property.
Property trusts are considered an excellent investment option if you want exposure to the property market without any of the stress that comes with being a landlord.
Of course, much like any investments, it’s always worth doing your due diligence before diving head first into a property trust. In this article we are going to investigate the property trusts available to you, the difference between listed property trusts and unlisted property trusts, and how a property trust might benefit your investment portfolio.
How property trusts work in Australia
In Australia, all registered property trusts are regulated by the Australian Securities & Investments Commission (ASIC). The ASIC exists to protect you as an investor, so this is a good thing. You should also know that all registered property trusts must be managed by a fund manager with an Australian Financial Securities Licence (AFSL), which is a legal requirement for any business providing financial services.
As a general rule, investing in a property trust is considered simpler than buying property directly. Purchasing a commercial, residential or other specialist building in its entirety comes with high upfront costs, such as stamp duty, legal costs and a hefty deposit. There’s also a lot of rigmarole involved once the property is in your position too – from maintenance fees to sourcing tenants and everyday administration.
But if you invest in a property trust, a fund manager will handle all of these logistics for you.
Australian property trusts are either listed or unlisted. If you choose to invest in an unlisted property trust, you will usually need to apply to the trust’s Responsible Entity for approval and the application process will vary with each trust. Once your application to invest in the trust is approved, you will purchase ‘units’ directly through the trust managers.
Listed property trusts on the other hand, which are more commonly known as Real Estate Investment Trusts (or REITs), are listed on the Australian Securities Exchange (ASX). As an investor, you will purchase and trade ‘units’ on the ASX. Along with general movements in the stock market, the unit price is based on the value of the building(s) owned by the trust. As with everything traded on the ASX, the value can rise and fall.
There are pros and cons to each type of trust, which we will explain in further detail later in this article.
When you invest in an Australian property trust, you will earn regular distributions from rent and other assets attached to the trust. The amount you receive will be calculated after any expenses are paid out, such as management fees or other additional costs. The income you earn and expenses that you pay will be proportionate to the number of ‘units’ you own in the trust.
While property trusts are a popular option for many Australians, all investments come with risks and property trusts are no exception. It is important that you understand the terms of the trust and any potential risks before you jump in.
Investing in an unlisted property trust
Unlisted property trusts are considered an attractive option for many investors because their price volatility is a lot lower than REITs. This is because their value is influenced by the broader property market, rather than the stock exchange. However, unlisted property trusts will typically require a much higher minimum investment – anywhere from $10,000 to $25,000 is usually the norm.
There are two types of unlisted property trusts: closed-ended and open-ended.
A closed-ended fund (also known as a fixed-term fund) usually owns a single property, such as a warehouse. The property will be held for a set period of time, usually between five and 10 years but it could be as short as 18 months. Because of the set commitment period there is no risk of forced sale. At the end of that period, you and anyone else who has invested in the fund, will vote on the future of the trust. In most cases, the property (or properties if there are more than one) will be sold and you will be paid out any income owing to you.
Open-ended funds have no set maturity date and there is no limit on how many properties can be purchased. The trust can keep raising money and use it to invest in additional properties. An open-ended fund has no fixed end date and the fund can continue to invest in properties indefinitely, providing it has sufficient capital. You will be able to enter and exist the fund at regular intervals (your fund’s manager will determine this).
Investing in an REIT
If you don’t have an excessive amount of money to invest, an REIT may be a better option for you. Historically, they are one of the best performing asset classes, and you can also often invest in an REIT with as little as $500. What’s more, as the trust is listed on the ASX, you can also buy and sell at any time.
Of course, this also means that the value of the REIT is driven by changes in the market and you may incur transaction costs as you would with other assets acquired on the ASX.
Listed property trusts are open-ended and they tend to own several property assets, sometimes dozens. But dividends are paid less regularly than unlisted funds (usually bi-annually), which means you will need to be more mindful of your cashflow management if you chose this investment vehicle.
Unsure which property trust is right for you?
We’d be happy to discuss your options with you in greater detail. If you’d like to get in touch with our expert team, you can do so now by clicking here.