Unlisted property trusts are not all the same

Unlisted property trusts are one of the few remaining investment classes still providing healthy returns for retail investors, but experts caution it’s important to know what to look for when choosing one. 

It’s no surprise that retail investors are flocking to unlisted property trusts, given their stellar performance. 

Over five years the annual performance of unlisted property funds have been an outstanding 21.6 per cent, according to global index provider MSCI. 

But experts warn that not all managed property funds are the same, and investors should always ‘look under the hood’ and do their due diligence before committing to any investment. 

So what key factors should retail investors consider when choosing an unlisted property trust? 

Management

Louis Christopher, the Managing Director of SQM Research, which rates asset classes including unlisted property funds, says the first thing he looks for is the track record of a fund’s managers and their previous experience with the class of property the fund owns. 

Our Managing Director, Philip Ryan agrees. 

“A strong investment manager underpins the success of any investment, in any class,’’ says Philip. “Investors should always read a fund’s PDS and other sources such as independent research to ensure the people they are entrusting their money to are experienced and capable.’’ 

Property type

The class of property a trust holds plays a large role in its stability and returns. For example, many areas of the residential property market are enjoying price appreciation, while at the same time in the retail sector, low or negative capital growth is more prevalent. 

Industrial property is currently attracting a lot of attention from large and small investors and property funds alike on the back of emerging economic trends such as a fast-growing logistics sector. 

Tenants

A property trust’s cashflow is heavily dependent on rental incomes, so it’s critical that management do their due diligence when it comes to tenants, says Philip. Key considerations here are the quality of tenant companies, as well as the duration of leases. 

“For example in the case of Trilogy’s Industrial Property Trust, which is currently raising capital for the acquisition of new properties, our incoming tenants include global heavy equipment manufacturer Komatsu, and Mineral Technologies, a wholly owned subsidiary of listed company Downer EDI.” 

“That’s the kind of high-calibre tenants that we believe can endure across economic cycles.” 

And once its new acquisitions are bedded down, the Industrial Property Trust will boast a WALE (weighted average lease expiry) of over six years, meaning a predictable long-term revenue stream. 

“As property managers, at Trilogy we are always looking at least 12 to 18 months ahead when we’re in dialogue with our tenants,’’ says Philip. “Finding new tenants is a time-consuming exercise, so for us it’s important to get to know them well and work hard at keeping them happy.’’ 

Gearing

Most property trusts are geared, meaning that to purchase properties some capital is raised from investors with the remainder financed via debt, secured by mortgages over the properties. 

With the cost of servicing debt currently at historic lows, the incentive to borrow has increased. This has led to suggestions in the media that some highly geared unlisted trusts may be exposed to sudden changes in interest rates. 

Philip agrees that aggressive gearing should always be an area of concern, even in the current ‘lower for longer’ soft-rate environment. 

“The global factors that drive borrowing costs are notoriously difficult to forecast, so we take a conservative approach to gearing,’’ says Philip. “In the case of our Industrial Property Trust, for example, target gearing is a maximum loan-to-valuation ratio of 50%.” 

“However, after the current round of raising and acquisitions, the Trust’s gearing will drop to 35%.” 

“We are currently aiming to de-leverage. And of course, having that unutilised borrowing capacity on hand also gives us the room to be more nimble when it comes to future potential acquisitions.’’ 

Liquidity 

An investment in an unlisted property trust is illiquid by nature. Some funds may preclude withdrawals for a period of up to 10 years. And distributions too can vary widely, with some paid monthly while others may be quarterly or annually. 

“In the case of Trilogy’s Industrial Property Trust, withdrawal offers are intended every four years and our distributions are paid monthly,’’ says Philip. 

“In return, the Trust aims to provide investors with a regular income stream (forecast to be 8.00 per cent p.a. for the period December 2019 to June 2020), as well as the opportunity for capital growth over the long term.” 

“As an investor, you’re always looking for competitive returns, but it’s important you also take your cash flow requirements into consideration as part of your long-term planning.’’ 

For more, check out what to look for in your next Unlisted property trust.