Property trusts are blowing the roof off traditional bricks-and-mortar investments, encouraging many investors to consider switching from suburbs to property shares.
Top-performing real estate investment trusts are producing double the returnson direct property, eclipsing low-single-digit returns from bank accounts and government bonds that are lagging at record lows.
But market volatility, illiquidity and small print conditions buried in the back of prospectuses have a history of turning promises of a rock-solid investment into a house of cards.
“They are related like cousins – similar but not the same,” says Tony Crabb, head of research for Savills Australia, about real (or physical) property and other forms of property investments.
There’s no shortage of trusts that pool funds to invest in a range of property, ranging from residential through to retail and commercial, mortgages and mortgages with varying degrees of risks and returns.
Investors in Sydney, the nation’s top real property market during the past 12 months, received an average return of about 13 per cent on residential property.
Australian Real Estate Investment Trusts (REITs), which are listed on the Australian Securities Exchange, averaged about 19 per cent, with top performers higher than 25 per cent.
Other property-related investments – ranging from unlisted and mortgage trusts through to residential mortgage-backed securities –all averaged positive returns higher than bank accounts.
An investor buying a property has to balance expected rental returns with set-up costs, management fees and taxes.
Crabb reckons some investors confuse investment properties with property trusts, which have sophisticated structures and often involve wide-ranging investment mandates.
“It’s a lot different to rent collection,” says Crabb about the additional issues an investor needs to consider.
Wishful thinking, naivety or gullibility contributed to big losses for investors when the values of trusts plunged during the global financial crisis.
Many investors discovered too late that fund managers had the authority for high gearing, overseas investments that exposed them to currency risks and the ability to switch assets between funds, which often turned high-flyers into turkeys. Many managers also had wide discretion about when investors could get back what was left.
Investors considering a trust, which spreads the risk across a range of assets, need to know the manager’s track record, how much it can gear, exposure to unhedged overseas assets and exit strategy.
Louis Christopher, managing director of SQM Research, a company that analyses different property asset classes, says growing investor interest will “flourish” as yield-hungry investors look around for better returns.
Some of the top performing listed REITs are already trading at 10 per cent above their net asset value.
“Risk and reward is generally well matched,” says Crabb about investors bidding up share prices. “There is always the risk of a mismatch but in the end it will unwind – but not any time soon.”
Kevin Prosser, a manager for Lonsec Research specialising in unlisted property trusts, encourages investors to make sure total return is from income and capital growth and not investors’ capital being paid back to them.
Prosser recommends investors seek advice from an adviser who has read the small print, and an accountant, to make sure they are comfortable with the risk and that it matches investment goals.
For example, Prosser highly recommends Australian Unity Healthcare Property Trust, an unlisted fund, because it has quality assets, a flexible balance sheet, acceptable gearing, experienced management and is in a sector with healthy growth prospects.
It also has a clear exit strategy, which means investors know how – and when – they can get their money back.
The Property Council’s website features performance tables and investment tips. Research companies like SQM, PIR (Property Investment Research) and Lonsec also provide analysis based on a range of sensible criteria.