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How to fund property investment through unlisted property trusts

Posted on Aug 21, 2016

With banks tightening their lending criteria in property markets it has become increasingly difficult for individual investors to find the equity to directly acquire property assets.

Unlisted property trusts provide a mechanism for investors looking for exposure to commercial, industrial and retail property to participate in ownership of such asset classes when they may not have the financial capacity to invest directly themselves.

Unlisted property trusts, also called funds, syndicates or schemes, are an alternative way to invest in property. Investors buy ‘units’ in a trust holding investment property or properties, which are managed by a professional investment manager.

Generally the initial capital remains invested until the property asset(s) is sold when the trust ends, and any net proceeds are distributed among the investors. Throughout the life of the trust, investors also receive income distributions that are paid at set intervals (e.g. monthly or quarterly).

Investment properties are chosen by the investment manager and bought by the trust. The investment manager then manages the associated maintenance, administration and rent collection. The property classification could be commercial, retail, industrial or some other class.

Gearing levels in unlisted property trusts tend to be modest (by comparison) and therefore fit more reasonably within the banks appetite for lending in the current environment.

There are various factors that investors should consider when assessing a potential investment in an unlisted property trust:

Investment strategy. What is the fund’s investment strategy? Does it match your income and/or capital growth needs?

Gearing. A loan to value (LVR) ratio of between 30 and 50 percent is considered reasonable, while funds that are more than 50 per cent geared should be examined with greater scrutiny.

Loans. Are there any risks associated with the maturity of the loans taken out by the trust or interest cover ratios?

Fees. Should these be based on net, not gross assets, which prevents managers being rewarded for increased gearing. Even so, is the performance fee based on a reasonable hurdle?

Asset quality. Ensure asset quality for trusts invested in long leases with strong tenants to ensure quality cash flows.

Valuations. How and when does the fund value underlying assets? Is it done by an independent third party? This information should be disclosed in the Product Disclosure Statement.

Related party transactions with family, friends or associates. The manager should disclose arrangements relevant to investment decisions.

Net Tangible Assets (NTA). How is the manager calculating NTA on day one? Are acquisition costs being capitalised or written off?

Quality and frequency of reporting. What information does the manager provide to investors on an ongoing basis?

Distributions. Are they being paid from operating cashflow or being artificially supported from unrealised revaluation gains, capital or additional borrowings?

Brendan Jones is a partner at Pitcher Partners