Types of property funds

Commercial property can be a very attractive investment, but there are good reasons to invest via a managed fund. We explain the different types of property funds available.

The idea behind property funds is very simple. You let investment professionals do all the work involved in growing and managing a portfolio of quality properties, saving you time and effort.

A managed fund can also help you achieve better returns than you could by investing directly because the fund management team is comprised of professionals with their fingers on the market pulse.

Even if you have the confidence to invest in commercial property directly, you’re unlikely to achieve the same level of diversity that a fund provides, and diversification can be the key to minimising risk while maximising long term returns.

With a variety of types of funds to choose from, it’s important to select the fund best suited to your needs and goals. Let’s take a look at what’s available.

Listed Property Trusts

As the name suggests, listed property trusts – known as Australian Real Estate Investment Trusts (A-REITs), are listed on the Australian Securities Exchange (ASX). This means it doesn’t take much capital to become an investor. A few hundred dollars (the ASX minimum is $500) can get you started in much the same way as trading shares.

Being listed on the stock exchange also makes A-REITs very liquid, meaning you can easily sell your stake and have the cash in your account within 24 hours.

There are potential downsides to consider. The first is that some A-REITs are ‘stapled’ securities. A single share in an A-REIT buys one unit in the property trust and a share in the company that manages or develops the fund’s properties. These stapled securities cannot be sold separately, and for some investors this can be a stumbling block.

The biggest drawback of A-REITs is that as listed investments, their value can be impacted by broader sharemarket volatility.

In early 2020 for instance, when the Aussie sharemarket plunged over 30% at the start of the COVID pandemic, the S&P/ASX 200 A-REIT Index, which tracks the value of the A-REIT sector, fell by 44%1. The underlying properties hadn’t changed, but sharemarket sentiment had. In this way, the market value of an A-REIT may not always mirror the value of the trust’s property portfolio.

This is an important consideration especially if you want, or need, to sell out your investment during a sharemarket low.

Unlisted Property Funds

The key difference between listed and unlisted funds is that unlisted funds are funds you buy into directly, and not via the stock exchange as you do with listed funds.

Westbridge only offers unlisted funds and these include both commercial funds and residential funds.

Conversely to REITS, investments in unlisted property funds are only available when a property is purchased, which means that investors will have a shorter time period over which to invest funds before the raising closes. This investment is also fixed for the duration of the fund, with assets only being bought and sold in the parameters set out in the fund’s constitution.

Like A-REITs, unlisted funds can provide both ongoing income – or ‘distributions’, – as well as the potential for capital growth when the fund’s underlying properties rise in value.

Unlisted funds are likely to pay distributions monthly or quarterly, and this frequency can be a real plus for an investor’s cashflow. By contrast, A-REITs tend to pay dividends bi-annually, which can call for investors to carefully plan and manage their cashflow.

The most compelling advantage of an unlisted fund is that the value of your investment isn’t subject to the vagaries of the share market. This can be very assuring, and it also offers further diversification of an overall portfolio, especially if you hold other listed securities.

Unit holders in an unlisted fund may also have voting rights, which lets investors have a voice around issues like the potential redevelopment or extension of a fund property.

Wholesale versus Retail

Unlisted property funds can be further broken down into ‘wholesale’ and ‘retail’ funds. This can shape who is able to invest in a fund.

Wholesale funds

To be regarded as a wholesale investor, you need to meet specific criteria, including at least one of the following:

  • You have net assets valued at more than $2.5 million
  • You have earned gross income of at least $250,000 annually for each of the past two financial years
  • You are willing to invest $500,000 or more into the fund.

Upfront capital requirements are usually high for wholesale funds, often with a minimum investment of at least $100,000. The information provided about the fund may also not be as in-depth as for a retail fund as it’s assumed wholesale investors have greater knowledge of investing.

Retail funds

While plenty of investors won’t make the cut into a wholesale fund, the option of a retail fund is far more accessible.

How much you need as a minimum investment varies between retail funds, but it will typically be far less than for a wholesale fund.

Importantly, retail funds are required to produce detailed ‘product disclosure statements’. These spell out exactly how the fund works, as well as potential risks, so investors can make an informed decision.

To learn more about Westbridge’s unlisted funds, contact us on 08 9321 5566 or submit an online enquiry form and one of our friendly team will be in touch.

1 https://www.spglobal.com/spdji/en/indices/equity/sp-asx-200-a-reit/#overview

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