by Jason Huljich

Despite the strength of the sector, advisers are slow to return to unlisted property investments.

Most investors suffered during the GFC, including those who invested in unlisted property funds. The massive credit squeeze saw heavily geared funds falter, and some investors suffer.

Fast forward to 2014, and unlisted property trusts are very different beasts. Gearing is down, transparency is up, and many of the less scrupulous managers have disappeared, and the result is that quality managers are again experiencing strong inflows from retail investors.

Unfortunately, for many advisers, the scars have still not healed. Many are now in gridlock, slow to reassess alternative investment options. This is particularly true of advisers who are part of a national planning network, and for the 85% of advisers aligned with the big banks, looking further afield than their own investment product offerings is rare.  Evidence of the shift can be seen clearly by looking at the provenance of investors into our unlisted funds. Historically, 80% of investors were advised, and 20% came directly. Since the GFC, the percentage has changed to 50% advised and 50% direct, primarily SMSF investments through word of mouth recommendations. 

Despite these concerns, the fact is that when term deposit rates dip below 5%, investors start looking for alternative investments that can provide higher returns and if they are also concerned about smoothing returns and reducing volatility, property can fit the bill.

However, unlisted property funds are inherently illiquid, so with liquidity still a major concern for many investors, some may believe that listed property trusts are the preferred property investment. Property returns with the added bonus of liquidity.  Well, attractive as this sounds, the truth is that when listed property is far more closely correlated to equities than it is to direct property.  It isn’t the defensive, direct tilt to property that unlisted property trusts are.  And while liquidity can be important, in times of panic, when markets fall sharply, liquidity can carry a high price. In 2009, the AREIT index fell by 70%, leaving investors reeling. Needless to say, the value of the underlying properties in these trusts had not fallen by 70%, but this was cold comfort to investors looking to exit their investment at that time.

On the other hand, unlisted property funds are illiquid, and there is no avoiding that fact.  Transaction costs in property markets are high, and as a result, sophisticated investors understand that you can’t expect to buy a property one week and sell it the next for a profit. 
At Centuria, our unlisted funds run for between 5-7 years.  However, if you need to access you money before the fund ends, no matter what the circumstances, you will need to find another investor willing to buy your units. This is not necessarily challenging, particularly in a strongly performing fund where other investors are happy to increase their investment, but it is certainly something to bear in mind.

Minimum investments in unlisted property can also be a barrier to entry. Our minimum is $50,000, but investment amounts of between $100,000 and $250,000 plus are more usual.  For high net worth retail investors, amounts of this size suit them, as they are unlikely to interfere with asset allocation decisions, yet allow them to take advantage of opportunities they see in the property sector.

So which is the better bet – listed or unlisted? The bottom line is that both listed and unlisted property structures have a place in a balanced portfolio. Exactly what the exposure to each should be is a question for the individual investor, taking into account personal circumstances. Historically, allocations tended to be 30/30/30 to cash, equities and property, but we are currently seeing exposure to property closer to 10-20%. 

When it comes to choosing an unlisted fund, it’s important to bear in mind that much depends on the quality of the manager you choose, and there are a number of key factors to keep in mind.

At Centuria we communicate regularly with investors in a way that goes well beyond ASIC requirements. We produce quarterly reports which outline debt levels and update investors on any tenants, leases and the properties themselves. In addition, we hold quarterly teleconferences which give all our investors the opportunity of questioning senior management about their fund and our investment decisions. If more important decisions need to be made, such as selling an asset, or undertaking a significant upgrade, special investor meetings are held.

So what’s the bottom line? Are advisers wise to treat unlisted property structures with extreme caution? The answer is that the world has changed. Unlisted property funds have much to offer an investor looking for a smooth income stream and the potential for capital growth via a direct property exposure. For those unable or unwilling to invest the large amounts required to purchase quality commercial stock directly, but can see the opportunities on offer in the sector, they are an option worth considering.

However, success does depend on the manager you choose. A track record of success is a good starting point, as is a culture of transparency in investor communication and across the board.