Unlisted real estate has long been a favourite of institutional investors due to its reliable, tax-advantaged income and the potential for capital upside. The challenge for smaller investors is its lack of liquidity, which can see funds locked up for between 5 to 7 years. 

If diversification really is the only free lunch in finance, then commercial property has an important role to play in any investment portfolio. Over time, real estate has shown itself to have a low correlation to equities and bonds, as well as having a competitive, risk-adjusted relative rate of return. What it does have is a positive correlation with anticipated and unanticipated inflation, meaning it offers a positive inflation hedge. This combination of factors makes it an attractive asset class, both in terms of the returns it offers and its diversification benefits. 

Of course, using the past as a predictor for future performance is no guarantee of results, and it’s important to bear that in mind when deciding where to invest. But at the same time, investors could do a lot worse than to consider commercial real estate as part of their investment portfolio now. 

Commercial real estate particularly attractive in this moment

Interest rates are at historically low levels, which means that yields from commercial real estate compare very favourably with bonds, and while there is a difference in risk profile, the potential for capital growth provides an additional upside kick. Yields from commercial property are usually inflation-linked (because they are tied to commercial leases), which is more good news for investors. And thanks to depreciation and other deductible expenses associated with property, income can be tax-advantaged as well. 

And if you are looking for true portfolio diversification – as a means of mitigating risk and providing downside protection – recent history has some valuable lessons that show real estate in a particularly flattering light. The long-accepted wisdom that equities and bonds are always de-correlated broke down during the GFC, when the two began to move in lockstep, and this in turn prompted investors to look at portfolio diversification differently. 

The result is an increase in demand for alternative assets, including commercial real estate, to provide true diversification. 

Unlisted versus listed exposure

The next question investors ask themselves is how best to achieve real estate exposure. For most investors, actually buying a commercial property outright is out of possible bounds, so pooling money with other investors to access commercial property is generally the best option. This can be done in one of two ways: via the listed A-REIT market, or via an unlisted trust.

Both have their pros and cons, and both have a role in a diversified real estate portfolio, but one of the most significant differences between the two lies in their structure. A-REITs are listed, meaning investors can buy and sell units easily, whereas unlisted trusts typically lock up funds for between 5 to 7 years, during which time it can be difficult or impossible to exit prior to the fund winding up.

On the other hand, because they are listed, A-REITs tend to be highly correlated with equity markets, and therefore offer less direct property exposure than unlisted property trusts. 

Unlisted trusts, which in many cases comprise a single commercial office property, offer predictable and regular income that is based on leases to quality tenants. In addition, their performance is less volatile than that of listed investments, because valuations are typically made annually (rather than daily, as with listed vehicles). Volatility is lower still because annual valuations are based more on reliability of rental income than on the transaction data and extraneous market-driven factors that influence A-REIT valuations.

At the same time, due to the high minimum investment barrier and illiquid nature of an unlisted trust, they are not suitable for all investors, despite strong demand. For the same reasons, closed-end fully unlisted trusts are unsuitable for platforms, which means that financial advisers cannot always recommend them to all clients. 

The good news is that it is possible to access the benefits of direct property exposure, with the ability to exit.

Direct property exposure – with liquidity 

The Centuria Diversified Property Fund is a multi-asset unlisted property fund that is open-ended, and offers daily unit pricing and a limited monthly liquidity. In other words, investors can access the direct property investment benefits of an unlisted fund, but with some ability to withdraw funds in any month. As with most listed and unlisted funds, distributions are made monthly and can be re-invested via a reinvestment program if required. 

The Fund’s aim is to provide tax-effective income, with the potential for long-term capital growth. The portfolio is made up of a diversified group of commercial office assets across Australia, approximately 80% of which are held via Centuria’s unlisted property trusts. Looking forward, however, the intention is for the Fund to acquire direct commercial property assets as it grows, probably in the $10 to $20 million range. You can see the most recent Fund fact sheet, which contains details of the Fund’s performance and portfolio, here.

The strategy for the Fund is the same as Centuria’s overarching strategy for all of its funds. We are asset-specific buyers, and rely heavily on our expertise in active asset management to extract value from our properties. This means we don’t reject markets out of hand (even those with relatively weaker fundamentals), rather we purchase properties with the aim of unlocking value – through our hands-on approach to refurbishment, facility upgrades, and development of spec fit-outs, undertaken by an in-house team of asset managers. And, when it comes to accessibility for advisers and smaller investors, because the Fund is open-ended and offers some liquidity, it sits on a number of platforms and wrap platforms so is easy to access. 

While there are no guarantees in property, as in any investment – given that yield compression is no longer doing investors’ work for them – active property management is more important than ever. We are confident our active approach to both acquisitions and property management will continue to bear dividends for investors. 

Disclaimer: Information relating to the Centuria Diversified Property Fund (Fund) (ARSN 611 510 699) is issued by the responsible entity of the Fund, Centuria Property Funds Limited ABN 11 086 553 639 AFSL 231149 (Centuria). This information is general information only and does not take into account the objectives, financial situation or particular needs of any person. You should consider whether this information is appropriate for you and consult your financial or other professional advisor before investing. You should obtain and read a copy of the relevant Product Disclosure Statement (PDS) for the Fund before making a decision to invest. Centuria and its associates will receive fees in relation to an investment in the Fund. An Investment in the Fund is subject to risk including possible delays in payment or loss of income and principal invested. Centuria does not guarantee the performance of the Fund.

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