Imagine if someone told you it was possible to tap into the upsides of the red-hot Australian property market without the downsides of owning a rental property.
It sounds too good to be true but it is possible, by using a little-known investment product called an unlisted property trust. You may not have heard of them, but they provide many of the benefits of a buy-to-let investment, while escaping some of the well-known pitfalls of residential property ownership.
Brisbane-based Phillip Ryan is a veteran of the investment game.
He’s been making his money work harder for him since he was 14, when he learned about shares in his high school maths class and used the cash he’d earned working at the local garage to take his first punt on the stock market. He was hooked, and has spent the rest of his life investing personally and professionally, with a special affection for property.
Ryan is the managing director of Trilogy, a fund manager that specialises in property-based investments, and he’s a big proponent of unlisted property trusts as an option for investors who want a regular income from their assets.
So, how does such a trust work and how could it benefit you too?
The simplest way to describe an unlisted property trust is as a syndicate of people who pool their cash to purchase a commercial property such as a factory or warehouse, industrial units, a shopping mall or office block. They agree on the minimum amount of money required from each investor and on how long that money will be locked up, and these and other rules are set out in a constitution.
The syndicate, the purchase of the property and the property’s management, is run by a professional manager (such as Philip Ryan’s Trilogy) in accordance with the constitution.
Investors receive a regular income from their investment (monthly, quarterly or annually) and the trust aims to return the investors’ principal investment and any capital gains that might be made on the investment – two features that make an unlisted property trust well-suited to retirees who want a stable income over a defined period while also growing their wealth.
You’re not exposed to the volatility of the stock market, which means you’re ‘hedged’, as pro investors say, against a plunge in share prices. This ticks one of the biggest boxes all investors aim for – diversification.
If your parents were like most, they probably advised you to never put all your eggs in one basket. And they were right, especially when it comes to deciding how to create the income you’ll need in retirement. That income needs be both as high as possible and stable over the long term if you’re going to get maximum enjoyment out of your retirement.
But no matter what you invest in, there’s a risk your returns will fall and your income will fall with them. That’s why many experienced investors talk about diversification – that is, investing your money in a variety of assets inside and outside of the super system, so if returns from one asset fall, the drop is offset by rises or greater stability in others.
That’s where property, and indeed an unlisted property trust, comes in, because the property market rises and falls independently of the stock market, and thus offers the possibility of offsetting how your super fund, which is more commonly invested in shares, is faring.
You can get exposure to ‘growth sectors’ without needing the expertise to pick specific company shares. This is somewhat like buying a house in a ‘hot suburb’, without all the hassle of buying a house then risking the suburb becoming more ‘not’ than ‘hot’.
As an example, Ryan picks out the industrial sector, which is currently benefitting from an upturn in the mining industry and the weaker Australian dollar. An unlisted property trust that’s focused on industrial properties allows you to hitch a ride on the upwards trajectory of the sector without having to tie your capital to the fortunes of any specific company.
You get real bricks and mortar, just as if you owned a rental property.
Unlisted property trusts buy specific properties, giving you the comfort of knowing your asset is ‘real’. As Ryan puts it, “you actually indirectly own a piece of that property – you can see it, touch it, we’ll even give you a walk-through if you want”.
You can increase the value of your investment in the same way you would if you bought a reno project.
Ryan explains that although commercial properties don’t typically see the rocketing price rises of a house or apartment, it’s possible for a smart fund manager to increase the value of a property by, for example, renegotiating a more lucrative lease with a tenant or purchasing an adjoining property and increasing the space available for rent.
This is something fund managers such as Trilogy actively work on doing for the investors in their trusts, with any capital gain at the sale of the property being distributed to investors.
You get a stable income, as you would if you were receiving rent from a residential property. Unlisted property trusts make regular distribution payments to investors, but with the added advantage of offering higher yields (the return you receive on your capital, expressed as a percentage) than are typically available on residential rentals.
“Yields on residential are low at 4-5 per cent and by the time you take out your holding costs, such as council rates, you’re down to 0 per cent or less than zero, so the income from that is negligible,” Ryan explains. “Commercial property rental returns tend to be much higher and your outgoings like council rates are typically paid by the tenant. That means the rental return after interest and management costs can almost entirely be passed on to the investor.”
As well as replicating many of the upsides of owning an investment property, unlisted property trusts have some of their own added benefits.
While selling a residential property can take months or even years in the wrong neighbourhood, a trust ties up your money for a specific pre-determined period – usually about five years – and then the property is put up for sale.
It’s also possible to buy in to what’s called an open-ended property trust that doesn’t have a specific lock-up period but buys several commercial properties over time and aims to offer investors regular ‘liquidity events’ in which they can sell their stake in the trust back to the fund manager such as Trilogy.
If you’re comfortable with some exposure to the stock market, listed property trusts, which are called A-REITs, operate in the same way as their unlisted cousins but are purchased as ‘units’ that are sold on the Australian Securities Exchange (ASX). These offer great liquidity, in that you can sell your units at any time, but the units fluctuate in value as a share does.
You don’t need a huge deposit to get in to property trusts. While a residential property requires a deposit of at least 20 per cent to avoid the additional cost of lenders’ mortgage insurances – which can equal many tens of thousands of dollars for property in the major cities – property trusts usually require a minimum investment of about $20,000.
There are some recent examples of the returns available on Trilogy unlisted property trusts.
One called the Melbourne Office Syndicate – Cheltenham was invested in a single property in 2013. Although it was initially due to be held for a term of five years, Trilogy decided to capitalise on the growing demand for such office buildings a year early, selling the building in 2017 at a profit of about $3 million on the original $24 million purchase cost. That meant that investors received a return equivalent to 8.75 per cent per annum, paid monthly, plus their original investment back a year early.
If you prefer an investment that requires a lower initial investment or offers greater liquidity, but can still help provide a stable, regular income, there are two other products you could investigate.
Trilogy offers a mortgage trust called the Trilogy Monthly Income Trust, which instead of pooling investors’ money to buy a commercial property, pools money that’s lent out to property developers and the construction sector. The mortgage trust requires a $10,000 minimum investment, has a lock-up period of just six months’ maximum, and has returned an average of 7.84 per cent per annum to investors over the past 11 years*.
Ryan explains that unlike residential buyers, commercial property sector borrowers can only borrow up to 70 per cent of the value of their purchase, giving investors a bigger buffer against loan defaults, and usually only borrow for 12-18 months rather than the 30 years that’s the norm on residential mortgages, so offer a quicker return on investment.
If you’re looking for an investment that requires an even lower deposit and offers greater liquidity, Trilogy’s Enhanced Cash fund offers a competitive rate of 3.85 per cent per annum for the month of July 2018.*
The fund invests approximately 70 per cent of its money in cash-style investments and term deposits, with the remainder invested in the Trilogy Monthly Income Trust, and allows investors access to their money in just seven days.
“Retirees have been hit very, very hard post-Global Financial Crisis, with low interest rates on their deposits, so more people are looking at alternative investments,” Ryan says.
“And although we’re considered an alternative investment, the way an unlisted property or mortgage trust is structured is actually quite simple. With trusts, we do all the analysis and due diligence of the investment or property purchase and its management, and investors get the return.”
As with all investments, the value of the property trust can fall, which would mean that you receive less than your original investment capital returned when the trust liquidates.
Also, unlisted property trusts aren’t subject to the day-to-day supervision of a markets watchdog such as the ASX, although they are regulated by the Australian Securities and Investments Commission (ASIC).
ASIC warns anyone considering investing in such a trust to read the product disclosure statement carefully to ensure you’re comfortable with terms of the trust and its manager.
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