Are YOU in the Know About Property Trusts?
Property trusts are a great alternative way to invest in property. In this article, Lifestyle Connexion's Licensed Financial Adviser ROD LINGARD gives us the low down on all things relating to investing in property trusts and how they can be used to build a robust and diversified property trust investment portfolio.
Professionally managed property trusts, also called funds or syndicates, are an alternative way to invest in property without having to outlay large amounts of money.
Investors are able to buy ‘units’ in an investment property or properties. The trusts are managed by a professional fund managers.
There are two types of property trusts – listed and unlisted.
Listed Property Trusts
Listed property trusts are listed on the Australian Securities Exchange (ASX), while unlisted property trusts are not.
As Listed Trusts are listed on the ASX, this means there is a market for the investments (units) to be bought and sold. The ability to trade units makes them liquid.
That is, if an investor needs to ‘cash in’ their units there is a market for them to be bought and sold.
A word of warning however, the unit prices can move away from the valuation of the properties the trusts own.
In plain English, this means the collective value of the units may exceed the actual value of the properties which are owned by the trust.
In a low interest rate environment, there is a chance that as investors chase yields or returns, they push up the prices of the units. Again in plain English, the price you pay for a unit may be in excess of the true value of the property in the trust.
Unlisted Property Trusts
In the case of Unlisted Trusts, there is no established market for the sale of units, and these types of property trusts are often called ‘illiquid’.
The initial investment remains in the trust until the property asset(s) is sold. At that stage the trust ends and any net proceeds are distributed among to the investors.
For both Listed and Unlisted Trusts, investors also receive income distributions that are paid at set intervals (e.g. monthly or quarterly). These distributions are predominantly derived from the rental income earned on the trust’s properties.
What types of properties are held in Property Trusts?
The trusts will usually hold a range of properties and can range from commercial, retail or industrial.
The type of properties are typically office complexes, shopping centres and large industrial warehouses. This means that the portfolios can be highly diversified.
Information about the trusts can be found in the Product Disclosure Statement (PDS). The fund managers will also provide updates about any significant changes to the trust.
In the case of unlisted property trusts, the investment manager is also required to publish ongoing disclosure documents.
What is ultimately important is the quality of the properties held in the trust, and the quality of the rental stream they generate.
These two things can be impacted by all sorts of economic, market, company and tenant specific issues.
Borrowing to Invest
One of the other benefits of property trusts is that, broadly speaking, you are able to borrow to invest. The borrowings might originate via a home equity loan, or a specialised loan facility such as a margin loan.
The interest associated with any loan used to purchase units in a property trust would typically be tax deductible.
Like most investments, there is risk associated with the potential reward and it is critical to ensure the investment risk profile suits your personal circumstances.
A licensed financial adviser can help you determine if a Property Trust is an appropriate investment for you.
Book a consultation with me
If you'd like to have a chat about your personal situation you are welcome to book an obligation free (one hour) consult with me. You can do that by emailing me or giving me a call on M: 0400 160 461.
Rod Lingard is a Mortgage Broker and a Licensed Financial Adviser at Lifestyle Connexion and can be contacted on M: 0400 160 461. Financial Advice is provided by Rod Lingard – Authorised Representative No: 248734 of MASU Financial Management Pty Ltd | AFS Licence Number 231140 ABN: 78 069 358 498.
General Advice Warning: This blog is not designed to replace professional advice. It has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the advice, in light of your own objectives, financial situation or needs before making any decision as to what is appropriate for you.