Listed property versus unlisted property: an investor's guide

While most Australians think of buying their first home or owning an investment property when it comes to real estate, these aren’t the only ways to invest in property.

“Property historically has been a good source of income and it’s certainly enjoyed renewed popularity as investors continue on the global hunt for income,” Cromwell Property Group head of retail funds management Hamish Wehl told nestegg.com.au.

“Property valuations have risen in that time and the competition out there is strong so there’s no shortage of equity but it’s important to find the right assets to deliver the right risk-adjusted returns because valuations have been stretched in some places,” he said. 

Two possible ways investors can benefit from the available incomes streams is to buy into listed and unlisted property, both of which carry their own set of advantages and disadvantages.

Listed property is a pooled investment you can buy in via the ASX, while unlisted property is usually owned directly in a trust and held for an extended period. But how do they measure up? 

Here's a quick discussion of the differences between listed and unlisted property

Listed property

Also known as A-REITS, or Australian real estate investment trusts, you can invest in listed property much like you would in equities. 

“They’re ASX- listed securities and they then own an asset or, more often than not, a portfolio of assets,” Mr Wehl said.

“Listed property is the way to get liquid property exposure for a very small minimum investment. You can trade on the market through a stockbroker or CommSec and get exposure to those stocks which then own an underlying property portfolio.”

When investing in REITs, it’s important to be conscious of the wider sector they’re operating in.

REITs can be used to gain exposure to different sectors, including residential, healthcare and mortgages. 

“Usually they’re sector specific, for example retail trusts such as Westfield, industrial trusts such as Goodman Group, and then you have pure office players such as iOS, as well as property stocks like Mirvac and Stockland groups,” Mr Wehl said.

In the same way that these are easily traded on the ASX, they’re also vulnerable to the same risk exposures.

“The data shows those stocks are highly correlated to the broader equities market so if the stock market happens to fall 20 per cent, more than likely those property stocks are going to fall as well,” Mr Wehl said.

While their very nature make REITs exposed to share market risk, it also ensures a certain level of liquidity.

“You can sell on the stock market on any given day and check the price of your investment. If you have to sell following a downturn on the stock market, you might not be happy with the price but there’s still a market there,” Mr Wehl said.

In a low-interest environment, where traditional income-producing investments such as bonds and term deposits may not be performing, REITs can provide a good alternative for investors. 

Unlisted property

"In the unlisted funds space, there are things called syndicates which are closed, back to basics trusts where there will be one asset or a number of assets in a single trust and it’ll be managed on behalf of investors for a fixed duration, and those trusts will pay distributions to investors,” Mr Wehl said.

“The key difference to the unlisted side is you’re getting direct exposure to those assets and there are a variety of structures from a simple unlisted closed-end trust where you pool a number of investors together, up to an unlisted trust regulated by ASIC or an unregulated wholesale trust.”

Unlike REITs, an unlisted property trust isn’t listed on the ASX, and its exposure is vastly different.

“You’ll buy an asset or a number of assets where investors get direct exposure to those assets. They’ll get the rental income that’s derived from those assets and the valuations rise or fall from those assets,” Mr Wehl explained.

“There’s no other noise that goes on within the structure. It’s not like you wake up one day and the stock market’s fallen 10 per cent and all of a sudden your unit price is 10 per cent less.”

However, while listed property remains an easy-to-sell investment, unlisted property carries set time frames.

“With the unlisted, it might be monthly, quarterly or yearly redemption for open-ended funds or it might be a set term, such as seven years holding,” Mr Wehl said.

When looking at unlisted REITs, there are a few important things to consider. 

“You want a really long lease term, good quality tenants, and you want reasonably low gearing, maybe around 20 per cent,” Mr Wehl said.

“With a tenant, it’s all about security of income stream so particularly looking for government tenants and high-chip tenants with a strong balance sheet, so you know they’re going to pay their rent monthly on time and that are reliable.” 

Investors should also look for long leases that exceed the duration of the trust. 

“The right property for a syndicate is a good quality building with a very long lease term that extends well beyond that trust term so when you go to sell it, it’s still attractive to buyers as it has a long lease tail,” Mr Wehl said.

“If you’re trying to sell it with only a two- to three-year lease term at the end of your trust term, it limits the number of buyers and potentially can expand your terminal yield.” 

Another type of trust might be made up of smaller rotating tenants to avoid relying too heavily on a single tenant. 

“A multi-let property is where you have what is called ‘tenant churn’, which may put off some people but if you have one tenant that leaves and only makes up a small per cent of income, it doesn’t leave a big hole in earnings,” Mr Wehl said. 

“Instead, you have a constant churn of tenants where they come and go and you don’t have one making up 50 per cent where if they leave, you get reduced distribution and need capital to refurbish property etc.” 

However, unlisted property is not without a level of risk.

“Where current valuations are, we see terminal risk value. If a fund buys something today where cap rates are well below long-term averages and you lock someone in, you run the risk that you won’t be able to return that capital at the end of seven years if those yields or cap rates return to long-term averages,” Mr Wehl said. 

And the winner is…

Rather than one being more advantageous than the other, each carries its own exposures, risks and benefits.

“There’s a whole myriad of ways to get exposure to property. and listed and unlisted property are ways of diversifying as well,” Mr Wehl said.

“A lot of advisers and clients will hold a listed exposure to property as well as an unlisted exposure, because the unlisted side often has a higher income yield pays monthly, isn’t as volatile and gives more of a direct exposure whereas the security side is vastly different again.”

While the property fund industry suffered a crisis of confidence post-GFC, Mr Wehl said there was a silver lining.

“After the GFC, some people would hear the words ‘property fund’ and their eyes would roll back and they wouldn’t have any part of it, but there have been lessons learned from it,” he said.

“The gearing has since been brought into check so you don’t see the aggressive 60 to 70 per cent gearing on open-ended funds that there was during that time. The quality of assets has also improved and managers in general have been cleaned up," he said. 

“It really brought in the quality of managers in play today and has delivered good returns for investors, while popularity has been brought back by low interest rates.” 

Ultimately, for investors looking to gain broad exposure to the property market and an alternative income stream, going beyond direct property versus listed property is necessary. It may be wise to consider having both listed and unlisted property in your portfolio.

Listed property versus unlisted property: an investor's guide

Jack Derwin

Last Updated: 02 July 2020 Published: 15 February 2017