Experienced property funds manager advocates keeping your eye on the fundamentals

It may sound like stating the obvious, but if you are looking to invest in property, the ability of the property you pick to provide income now and into the future, as well as the potential for capital gains when you sell, will be the key driver of returns.

Different property ownership structures, whether they be direct ownership, A-REITs or unlisted funds, all offer their pros and cons, depending on your investment requirements and the structure of your portfolio. And they all have their place. But the one thing that all property investment vehicles have in common is that their returns are based, in large part at least, on the returns from the underlying property assets they hold.

Having said that, it is also true that in some structures, returns are more closely linked to the underlying assets than others. Unlisted property, like direct property ownership, is one such structure. Because units in unlisted property trusts are not traded on the open market, returns are less influenced by outside factors such as market sentiment, and more influenced by the actual value of the properties they hold.

A-REITs, on the other hand, which are traded like equities, are more volatile. They are highly correlated to equity markets and returns are tied into the performance of the market as a whole and therefore less to the performance of their underlying assets than unlisted funds.

If you are looking to invest in property via a pooled structure, like an unlisted fund, there are a number of factors to consider when deciding where to put your property dollars.

Choose your manager with care

Like the properties themselves, not all managers are created equal, and however you choose to invest, it’s important to look carefully at the manager of the trust and ask yourself a few key
questions:

  • Do you agree with the manager’s investment philosophy?
  • Are the management team and property management team experienced, and do they have a good reputation in the industry?
  • Does the manager have a good track record of results?
  • What fees are payable and when?
  • If performance fees are payable, what are they, and are the hurdles the manager needs to meet crystal clear?

Choose your property with a clear eye…. to the future

When it comes to the properties in the fund itself, the first question you need to ask is why the manager chose to purchase one property over another, and whether your manager has clearly communicated their strategy in this regard.

Has the manager clearly defined their preference for one geographical location or sub-location over another? Do they have rational and researched reasons for their choice?  Have they given full and frank disclosure of the vacancy rate of the property, of the tenant mix and of the expected income?

In addition, once the decision to purchase has been made, it is important to understand what a manager intends to do to add value to the property. An ability to increase the value, not only of the income from a property, but also the potential for capital gain, really distinguishes one manager from another.

An exit strategy is extremely important. Your manager should have a clearly defined exit strategy which outlines both a proposed term and the hurdles that need to be reached to achieve the highest possible sale price.

At Centuria, our focus is on commercial property, so our management team keeps a focused eye on a number of factors which impact returns for our investors:

Location, location, location

Our current outlook for the commercial property market is that central CBD locations on the Eastern seaboard (particularly Sydney and Melbourne) are likely to provide the strongest returns going forward. We are therefore in the process of divesting ourselves of non-core properties in regional areas in order to focus on areas we see as providing better growth over the longer term.

Potential to add value

For any commercial property, the ideal mix is strong income revenue now, flow through tax benefits and the potential for capital growth in the future.

  • Some of the ways we seek to add value to our commercial assets are:
  • Refurbishments to the property more attractive to potential tenants and buyers.  These can include :
  • Upgrading building services, including lifts and air conditioning
  • Upgrading the foyer and common areas to increase the tenant appeal of the property
  • Upgrading the bathrooms and other facilities to provide a higher level of amenity
  • Looking at the NABERS (environmental) rating of the building and how that might be improved
  • Optimising the tenancy mix to ensure stability of income

Ultimately, there are no guarantees that property investment, like any other investment, will always perform well. But if you look carefully at the manager of the fund you choose, and assess their decisions and track record carefully, property continues to provide great returns in terms of income and capital growth.