Home The Essential Guide to Investing in Unlisted Property: parts 3 and 4

November 12, 2024

The Essential Guide to Investing in Unlisted Property: parts 3 and 4

Cromwell continually strives to help securityholders and potential investors better understand the nature of the market – and our business – so that they can make more informed investment choices.

In Insight 47, we explored key excerpts from parts 1 and 2 of Cromwell’s The Essential Guide to Investing in Unlisted Property – a comprehensive series of papers that has been compiled to be a valuable resource for anyone seeking to diversify their portfolio and explore alternative avenues for growth through unlisted property funds and trusts.

In that article, we defined the different property asset classes, and investigated various ways to invest in commercial property. Now, in the second part of this series, we will explore the excerpts from the final two parts of the Guide.

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Cromwell’s The Essential Guide to Investing in Unlisted Property is comprised of four parts:

Part 1 – The different property asset classes
Part 1 explores the differences between the residential and commercial property and provides an overview of the sub-classes of commercial property – retail, office, industrial, and specialist properties.

Part 2 – Various ways to invest in commercial property
In part 2 we examine different investment methods, ranging from direct property ownership to professionally managed property trusts.

Part 3 – How does an unlisted property trust work?
Part 3 provides insight into the structure of unlisted property trusts; the issuance of units; borrowing arrangements; property management; costs and fees, distributions; tax-deferred income; and the process of exiting your investment.

Part 4 – Reviewing an unlisted property trust
Before investing in an unlisted property trust, it is important to understand and review the provided Product Disclosure Statement (PDS) and Target Market Determination (TMD), particularly the ‘risks’ section, to fully comprehend the nuances of the trust and its assets. In part 4 we provide a summary of what to look out for.

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Excerpt from The Essential Guide to Investing in Unlisted Property: Part 3

How does an unlisted property trust work?

Unlisted property trusts can only be offered by licensed managers, who are called the ‘responsible entity’ of the trust. ASIC issues the manager an Australian Financial Services (AFS) licence – and the manager has a fiduciary duty to act in the best interests of investors, including prioritising the interests of unitholders over their own interests.

This section of the Guide explains two key documents that managers must provide to investors:

the Product disclosure statement (PDS); and
the Target Market Determination (TMD) – a newer document introduced as a result of new Design and Distribution Obligations (DDO) introduced by ASIC in October 2021.

A PDS and TMD must be provided for any type of trust you consider investing in, these being:

Fixed-term trusts

A fixed number of units are issued (usually at $1.00 each). The capital raising is completed when the full cost of the property, plus fees and costs less any borrowing, has been raised.

Open-ended funds

An open-ended fund continues to raise funds indefinitely so long as it can keep purchasing properties. Units will be issued based on a unit price, with the unit price based on the value of the fund’s properties and other assets. Unit pricing policies and frequency of issue will depend on the manager and fund.

Property management

A significant benefit of investing in an unlisted property trust is gaining access to the multi-faceted expertise of the manager. The best property fund managers have an internal property management division, which looks after the buildings in the trusts it manages. Having this function in-house ensures an alignment of interests between not only the manager and investors, but also tenants who are ultimately responsible for providing unitholders with real income.

Property management includes leasing, ongoing maintenance of buildings, building concierge services, fire safety, and other compliance requirements and – most importantly for you as an investor – making sure rent is collected!

Distributions

The trust will receive rental payments from tenants and this is passed on, less any expenses, to unitholders as distributions on a regular basis. Depending on the trust, distributions may be paid monthly, quarterly, six-monthly, or annually.

Tax-deferred distributions

Tax-deferred distributions can be an attractive feature of many property investments and have the potential to increase the after-tax return of an investment. The benefits of tax deferral can be significant, especially for those with high incomes. For many investors, an investment that offers 100% or even 50% tax-deferred distributions can significantly enhance the after-tax returns from that investment.

Cromwell’s The Essential Guide to Investing in Unlisted Property is available to download for free.

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Reviewing an unlisted property trust

The manager is critical when choosing a property trust. These are the people and organisations you are relying on – and paying – to carry out appropriate due diligence on the property asset, to build and manage the trust, and usually to physically manage its assets. In reviewing the manager, you should consider their experience and past performance, as well as whether they are financially secure; have good compliance process in place; are forthcoming with information; and more.

Among other elements, it is critical to consider the trust structure; distribution yield; and the property asset/s.

Trust structure

It is important to understand the trust structure to ensure the investment is suitable for your needs and anticipated outcomes. The product disclosure statement can be used to help you determine a) whether the trust fixed term or open-ended; b) what happens at maturity of the trust; c) how liquidity is provided (for open-ended trusts); d) how units are priced; e) how are properties valued; and more.

Distribution yield

The distribution yield is the income you can expect to receive for every $1 of investment (e.g. a dividend yield of 6% per annum means you can expect to receive 6 cents per year for every $1 invested).

The property asset

When reviewing the building(s) in a trust, there are a number of factors to consider and questions to ensure you have answers to before an investment is made. These factors include:

Location – is the property in an ideal location; on a major road; has access to public transport?

Building quality – what kind of capex is required to bring the building up to the required standard?

Capital growth – is there opportunity for capital growth? Is the building in a growth area?

Lease team – Ideally, for a fixed-term trust, the lease term will be longer than the term of the trust, as this ensures security of income stream throughout the term of the trust.

Lease – Is the rental rate market or is it ‘over-rented’?

Tenants – are the tenant blue-chip corporate or government tenants?

Weighted Average Lease Expiry – what is the vacancy risk associated with the property?

Green credentials – what is the NABERS rating for the property?

Understanding unlisted property trusts

For the full, unabridged version of parts 1 to 4 of the Essential guide to investing in unlisted property, please visit https://www.cromwell.com.au/real-expertise/investing-in-unlisted-property-trusts/

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