by Jason Huljich

Looking for unlisted property? Ask the fund manager these questions.

As term deposit rates and yields from other investments continue to decrease, investors are looking at  other investments to provide yield in their portfolios. The demand for unlisted property funds has increased significantly over the last 2 years.

The role of the manager in the success or otherwise of an unlisted property trust cannot be underestimated. But what's the best way to choose a manager you can trust to look after your interests?

The key is to ask the right questions - and be on alert for the right answers.

Choose the right manager, and the benefits of investing in unlisted property funds are many. You can access a share of a high quality property without having to come up with the multi-million dollar price tag and enjoy returns that combine stable yield and potential for capital growth. Also these returns are closely linked to the underlying property assets in the trust rather than the vagaries of the listed market.

In addition, returns from unlisted property tend not to be highly correlated with other asset classes, such as shares, which deliver real diversification benefits throughout the investment cycle. True, unlisted property doesn't offer liquidity, but investors are compensated by stable returns and certainty of cash flow, due to the locked-in nature of commercial leases.  Unlisted property also tends to be a good hedge against inflation because lease payment increases are usually inflation-linked or have fixed increases of 3-5%.

Having summarised some reasons for choosing listed property as an investment, we face the question of how to assess which unlisted property trust to choose. In my view, the best way to start is to focus on the factors you can control. This means the quality of underlying core assets and the management team.

The fact is that the first is inextricably linked to the second. The ability of a manager to choose quality properties prudently and extract maximum performance over the life of the trust, through active management of the asset, naturally contributes to better total returns to the investor.

The good news is that there are a number of good managers to choose from.

The GFC was the catalyst for a rationalisation and consolidation of the industry, and some of the less reputable groups have disappeared. Those managers that emerged unscathed and have gone on to succeed in the post-GFC world tend to have scale, experience, best practice governance and strong track records. Also, because the property yields currently on offer are higher than historical norms, we are now seeing better quality property being purchased by unlisted funds, including newer buildings with better quality tenancy profiles and in excellent locations.

So what exactly should you take into consideration?

The most important thing to look for is transparency. You should be able to ask for and expect to receive full and frank communication about all aspects of your investment.

Some of the important factors to take into account when choosing the right manager are:

  • The term of the trust
  • Is it a fixed term trust or open ended?
  • The assets in the trust

Do you know exactly what asset or assets are held in the trust? This means a detailed description not just of the property itself, but also information such as tenancy and lease profiles as well the risks and opportunities inherent in the asset.

The gearing in the trust

You should know how much debt the trust has, and what proportion of the property assets this represents.

You should also understand the manager's policy on debt and whether or not the gearing ratio is likely to change. If the trust is carrying debt, you should also know its interest cover, which is a measure of how comfortably the trust can meet its interest payment obligations.

The manager's ability to add value to the properties in the trust

Look at the track record of the manager; how it intends to add value to the property and the success it has had in the past.

Changes to the trust's constitution

Are these possible, and if so, what voting hurdles or other hurdles are required?

Early withdrawal from the trust

Is it possible to withdraw from the trust before it ends, and if so, what conditions must you meet, and what will it cost?

Fees and charges

What are the fees and charges for managing the trust?

Performance fees

Do these exist, and if so, what are the triggers and how much will they be?

Valuation policy

What is the manager's valuation policy; including how and when assets are valued?

Distribution policy

What is the manager's policy and practice on paying distributions and what are they expected to be?

Management structure

Who is responsible for the day-to-day running of the trust and the properties? What is their relevant experience?

Ultimately, unlisted property has much to offer, but as with all investments, there are inherent risks. It is never possible to avoid these altogether, but with careful due diligence, particularly regarding the manager of the trust, there are certainly rewards to be enjoyed.