Liquidity separates the property alternatives

Australians have always had a unique attraction to property and rightly so, as it has historically been a major source of investor wealth for many years. Residential investment properties have easily been the most popular, with household ownership levels above 10 per cent, according to the ABS. 

Other property alternatives…
Investors have a number of alternatives in the commercial property market including office towers, industrial estates, hotels, and shopping malls. These assets are usually only accessible through managed investments, such as Listed Property Trusts (LPTs) or unlisted property syndicates.

A common feature among LPTs and syndicates has been their exceptional performance, rewarding investors with returns of 14.1 per cent and 10.6 per cent per annum respectively over the last 5 years to June 2004.

Residential property, unlisted property and LPTs have different characteristics that need to be considered before investing. LPTs allow investors to purchase a diversified portfolio of real estate that is professionally managed. The fund manager selects properties to buy and sell, generally including assets across a diversity of geographic regions, lease lengths, and tenant types.

Because unlisted property trusts and syndicates are usually smaller vehicles they tend not to have the same diversification benefits.

Getting in and out of your property investments quickly
Syndicates and unlisted property trusts are not listed, which can be a major drawback for investors wanting to exit their investments. Unlisted property trusts typically have a standard twelve-month maximum redemption period making them an illiquid investment.  On the other hand, LPT unit prices are traded on ASX, allowing investors to enter or exit anytime during trading hours. LPT prices therefore exhibit greater price volatility than those of unlisted trusts.

Let the professionals maintain the properties
Maintenance and other costs associated with property ownership are unavoidable. Residential investors need to pay stamp duty, legal fees, insurance, repairs and on-going fees to real estate agents. These costs can reduce investors’ net returns.

LPTs and unlisted property trusts are not management intensive because the manager undertakes the on-going maintenance and management of the assets. The manager takes care of all the maintenance, administration, rental, and improvements and is able to keep costs minimal due to economies of scale.

Management fees range from 0.05% to 1.00% per annum, with syndicates on the higher-end, as economies of scale diminish in smaller funds. Investors in syndicates will also usually pay an upfront fee, termination fee and performance fee in addition to on-going management fees    

Yield is king with commercial property investments
Commercial property is generally considered a yield driven investment while residential property is a capital driven investment.  LPTs and unlisted trusts distribute income through the rents received from the portfolio of properties and are passed through to investors.

Income distributions from LPTs and unlisted trusts typically range from 6-10% per annum, with part of this income being tax-deferred. This means investors do not pay tax on a portion of income received on until the holding is sold. This makes them ideal for income seeking DIY investors and retirees. Direct residential investing has much lower yields ranging from 2.5%-5%.

Gearing your property exposure
Similarly to a home loan, margin loan facilities and instalment warrants are available to allow you to leverage your exposure to LPTs. Generally most margin lenders will allow you to borrow up to 70% on your equity, which magnifies your gains (or losses). The LPT itself also has in-built leverage, with the fund manager often using debt to invest in property opportunities. 

Further information on LPTs can be found on the ASX website at www.asx.com.au/PropertyTrusts.
 
Main differences of property investments?

• Property trusts offer a diversified portfolio of commercial property spreading risk whereas investment properties provide a single exposure.
• LPTs offer liquidity and transparency with the ability to buy and sell (all or part of your LPT) during ASX trading hours. Syndicates and unlisted trusts are generally illiquid
• LPTs daily pricing creates higher levels of volatility. The absence of a liquid residential or syndicate market means volatility is more difficult to measure 
• Returns from residential property are mostly from capital appreciation and where income levels are stronger in commercial property
• The factors driving returns in commercial property and residential property are very different, particularly the effects of interest rates on residential prices
• Income yields are typically between 6%-10% in commercial property and 2.5%-5% in residential property
• Professional managers operate LPTs and unlisted property vehicles and make investment decisions on behalf of investors
• Investing directly in property may have higher maintenance costs and administration (eg renovations, council rates etc) a compared to a pooled property vehicle
  

ASX is not liable for any loss suffered is a summary for the purpose of information only. Investors should seek advice from a licensed financial advisor to determine whether LPTs are suitable for their own individual circumstances.

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