Invest
Unlisted property: The asset class every investor needs to know about
Beyond the opportunity to diversify, unlisted property funds can offer an attractive yield and tax benefits for investors, writes fund manager Hamish Wehl.
Unlisted property: The asset class every investor needs to know about
Beyond the opportunity to diversify, unlisted property funds can offer an attractive yield and tax benefits for investors, writes fund manager Hamish Wehl.
For many Australians, property means the family home or a residential property investment.
However, property doesn’t just mean white picket fences and shiny new apartments. As the residential housing market becomes increasingly tumultuous, individual investors should consider diversifying into alternative property classes, such as unlisted commercial property.
Strong return potential
The Australian Commercial Property sector delivered a return of 9.5 per cent for the 12 months to 31 March 2019. Over five years, the sector has delivered annualised performance of 11.5 per cent, offering investors attractive and stable monthly income, especially in today’s low-rate environment.
Like residential property, income from commercial property is derived from the rent paid by tenants. However, security of income from unlisted commercial property is materially higher than residential property due to the binding and longer-term nature of commercial leases and the financial covenants of the underlying tenants.
The nature of unlisted property means, unlike A-REITs, it has a low correlation to equity markets, and as part of a diversified portfolio, can help provide consistent portfolio returns for investors over the long term.
Tax-deferred income
Tax-deferred distributions are an attractive feature of many property investments and can provide a substantial boost to your after-tax-income. In a world of low inflation and low interest rates, the benefits of tax-deferred distributions are extremely attractive to retail investors.
Under the current system, a portion of a property trust’s distribution usually consists of a tax-deferred component, which has the potential to greatly increase the investment’s return after tax. This is due to the trust’s ability to claim tax deductions for items such as depreciation, capital allowances, as well as the cost of raising equity and establishing the debt facility.
Some benefits of this are:
- The tax-deferred component can be reinvested, and the compounding benefit of this can add up over time;
- The tax-deferred component is usually subject to the 50 per cent or 33.33 per cent CGT discount if the asset has been held for longer than 12 months; and
- The deferral opportunity can offer tax planning opportunities. For example, tax-deferred distributions received before retirement may effectively be received tax free if the units are disposed of after transitioning to pension phase.
An array of assets and different investment options
Investing in unlisted property provides access to a wide variety of commercial assets, including high-quality office buildings, retail shopping centres, industrial properties, as well as specialist properties such as hospitals, medical centres, childcare centres, and retirement villages.
These assets often have attractive characteristics, including good locations, long lease terms, stable blue-chip or government tenants, and regular, stable income.
For these reasons alone, unlisted property warrants a closer look for investors.
Gaining access to these assets can be done through an open-ended fund or a fixed-term, closed-ended trust. With minimum initial investment amounts as little as $10,000, investing in a fund or trust provides greater accessibility and is far more cost-effective compared to purchasing a commercial property directly, an option generally only available to extremely wealthy investors.
Fixed-term, closed-ended funds usually hold one or more properties which must be held for a specified period of time, usually five to ten years. At maturity, usually the default outcome is that the property is sold, the trust wound up, and investors paid out.
Alternatively, open-ended funds do not have a maturity date or a finite number of units. Open-ended funds create liquidity by holding some of the fund’s assets in cash, using new investors’ funds to pay out exiting investors, increasing debt or selling assets if necessary.
These funds tend to hold a number of assets to increase diversification, but it is at the manager’s discretion to decide which assets to buy or sell.
Is unlisted property for you?
Commercial property can be a great way to diversify an investment portfolio which could already include residential property, shares, and bonds.
Investing in an unlisted property fund, run by a skilled and trusted manager who can diligently acquire the right property, add value through quality management, and manage the day-to-day operations can make commercial property a relatively simple asset class to invest in.
The key is to make an informed choice to find the right manager and portfolio to deliver the regular income and capital returns that are intrinsic to this asset class.
Hamish Wehl is the head of retail funds management at Cromwell Property Group.
Property
Property prices boosted by housing policies: RBA
The central bank has outlined the “pervasive” impact that policy has on property. ...Read more
Property
Labor’s ‘Help to Buy’ scheme not without its risks
With Anthony Albanese sworn in as Australia’s 31st PM, home buyers are excited at the prospect of accessing the new ‘Help to Buy’ scheme, but a property expert has warned that the risks may be g...Read more
Property
Australia's housing market is entering a ‘broad-based correction phase’
Westpac believes the housing market downturn is now underway. ...Read more
Property
ANZ now expects house prices will end the year lower
With higher interest rates on the horizon, the bank is forecasting larger house price declines than previously expected. ...Read more
Property
Which capital cities are most attractive to property investors?
A new survey has suggested that investor attention is shifting away from Australia’s two largest capital cities. ...Read more
Property
Market uncertainty fails to discourage foreign property investors
While interest from foreign investors in Australian property has remained strong, HLB Mann Judd warned that tax increases could see demand shift to other markets. ...Read more
Property
Regional renters forced to spend more of their income than ever before
Renters in regional areas are spending nearly as much on rent as home owners are spending on mortgage repayments. ...Read more
Property
Aussie home buyers now need to save for over 11 years for a deposit
Since early 2020, the time needed to save for a deposit has increased by more than two years. ...Read more
Wrapping up an eventful 2021
Listen now
What Omicron means for property, and are units right for first-time buyers? What is equity crowdfunding? Are industry super funds tapping into member funds to save their skins?
Listen now
Will housing affordability improve in 2022? Will buy now, pay later become the norm? Why are Aussies staying in failing super products?
Listen now
Who really benefits from crypto ETFs? How will the RBA respond to rising inflation? Could a mandate help address unpaid super?
Listen now
Property
Property prices boosted by housing policies: RBA
The central bank has outlined the “pervasive” impact that policy has on property. ...Read more
Property
Labor’s ‘Help to Buy’ scheme not without its risks
With Anthony Albanese sworn in as Australia’s 31st PM, home buyers are excited at the prospect of accessing the new ‘Help to Buy’ scheme, but a property expert has warned that the risks may be g...Read more
Property
Australia's housing market is entering a ‘broad-based correction phase’
Westpac believes the housing market downturn is now underway. ...Read more
Property
ANZ now expects house prices will end the year lower
With higher interest rates on the horizon, the bank is forecasting larger house price declines than previously expected. ...Read more
Property
Which capital cities are most attractive to property investors?
A new survey has suggested that investor attention is shifting away from Australia’s two largest capital cities. ...Read more
Property
Market uncertainty fails to discourage foreign property investors
While interest from foreign investors in Australian property has remained strong, HLB Mann Judd warned that tax increases could see demand shift to other markets. ...Read more
Property
Regional renters forced to spend more of their income than ever before
Renters in regional areas are spending nearly as much on rent as home owners are spending on mortgage repayments. ...Read more
Property
Aussie home buyers now need to save for over 11 years for a deposit
Since early 2020, the time needed to save for a deposit has increased by more than two years. ...Read more
