What’s the difference between listed and unlisted property funds?

As joint investment vehicles, managed property funds can give investors the opportunity to gain exposure to larger and potentially higher-quality assets at a significantly lower price point than investing in such assets directly, and without the hassles of managing these properties themselves.

Property funds are generally offered in two forms – listed or unlisted. Whilst both types are based on the similar premise of pooling funds to buy commercial real estate for investment returns, they can also behave differently in a number of other aspects, and as such will offer varying benefits and drawbacks to investors.

So what are the main differences between the two investment vehicles? And what factors do you need to take into consideration as an investor when selecting which one is right for you?

Similarities of unlisted and listed property funds

Unlisted and listed property funds work in similar ways in that investors contribute capital in return for a share of the asset (or assets) held by the fund, issued either in the form of units (unlisted property funds) or  securities (listed property funds).

In both cases, the assets are operated by a professional fund manager, like Westbridge Funds Management, who is responsible for selecting the investment properties and monitoring their performance as well as the ongoing administration of the fund (i.e. maintenance, improvements and rental collection).

In return for their investment, investors may receive:

• Regular income, called ‘distributions’, usually distributed monthly or quarterly for unlisted funds and bi-annually for listed funds; &
• A capital gain on their original investment. For listed funds, this is in the form of an increase in the price of their securities, and for unlisted it is in the form of a portion of the capital gain realised on the sale of the asset (relative to the initial units bought in the fund).

Listed property funds

The key difference between listed and unlisted property funds lies in the way funds are traded.

In Australia, listed property funds, also known as “Australian Real Estate Investment Trusts” (A-REIT), are listed on the Australian Securities Exchange (ASX). Investors are issued securities which behave similarly to shares in that they can be traded on the ASX through a stockbroker. It is this platform that provides a secondary market for investors and the benefit of high liquidity, with investors able to buy and sell their securities as they choose.

While this can be a positive for experienced investors with the ability to gauge when to enter and exit these markets, there are also negatives to being listed on the ASX. A downside for many investors is that the value of their securities can be subject to considerably more volatility, driven by changes in market sentiment and general perceptions of what the underlying assets are worth. In addition, dividends tend to be paid less regularly with listed funds, typically bi-annually, which means greater cash flow management is required on the part of investors.

It’s important to note that there can also be different forms of securities with listed property funds. While some will simply give you a share in the fund’s assets, other funds can offer ‘stapled securities’, whereby investors receive a share in the funds management company itself as well as units in the fund.

Unlisted property funds

Unlisted property funds are privately held and aren’t listed on a secondary (public) market in the same way as REITs. In this sense, they bear greater similarity to direct investment in that investors gain direct exposure to the fund’s underlying assets.

Contrary to listed property funds, investments in unlisted funds are usually secured for the duration of the fund period (determined by the fund’s constitution). Whilst these investments therefore offer lower liquidity to investors, the benefit of this is that unit prices are generally a lot less volatile and will be priced based on the capital value of the underlying assets rather than general market sentiment. As such, they won’t be subject to the same daily fluctuations as securities in listed funds.

Another benefit of unlisted property funds is that they typically offer investors greater control over their investments, with voting rights (i.e. to determine aspects such as fund extensions) being apportioned relative to each investor’s interest in the fund.

In addition, investors will generally receive distributions more frequently with these investments, usually monthly or quarterly, which can benefit those seeking greater regularity of income stream.