What To Look For In Your Next Unlisted Property Trust
For many years, Australians have embraced direct property ownership to secure their financial future. Given the property market cycle and historically low-interest rates, residential property is still highly preferred despite values contracting in some markets. However, unlisted property trusts, also known as property syndications, have gained popularity as an investment vehicle. Investors pool their money by investing in units in the property trust which will then purchase income producing property. The syndication structure provides direct access to commercial property (which they may not have had the resources to purchase on their own). The legitimacy of property trusts has been reinforced over the past few years following their strong performance in key sectors.
Many investors consider investment in a property syndicate as an opportunity to diversify into commercial real-estate and provide additional value to help them achieve their financial objectives. A professional investment manager, like Trilogy, leverages their investment skills and experience to source properties that meet the trusts’ investment criteria. The investment manager is then responsible for the trust’s investment performance.
To help you decide whether a syndicated property trust may be suitable for you, we’ve compiled a simple list of characteristics to look for when considering investment.
The type of property that forms the asset of the trust plays a large role in its stability and performance. Property types may typically include commercial, retail or industrial properties. Each carries its own risks and benefits.
Trilogy’s Head of Property Assets, David Hogan, comments that Trilogy has for some time focused on commercial office and industrial property.
“We carefully consider factors including geographic location, size, lease terms, tenant quality, any changes in technology or infrastructure, social & business trends, and supply & demand”.
An investment in an unlisted property trust is an illiquid investment which means your investment may not be withdrawn for a period up to 10 years, depending on the term of the trust. As an investor, you should consider your requirements for having cash-at-call, should you require it in the future and always review the product disclosure statement (PDS) for the trust to find out about the investment manager’s terms for withdrawal.
At Trilogy, our unlisted property trusts generally have fixed terms of five to six years. The reason for this longer-term approach is so that investors may benefit from the increase in the income as a result of annual rent reviews, with this compounding figure usually reflected in an increase in capital value.
“Distribution yield” is the income paid to investors and is expressed as an annual percentage rate, paid either monthly, quarterly, half-yearly or annually. For a property trust, the distribution yield is derived from the rental income generated by the property. As many property trusts are closed, the distribution yield is paid as a distribution to your nominated financial institution's account.
All property trusts within the Trilogy portfolio are designed to pay their distribution yield on a monthly basis.
The distribution yield paid to investors in a property trust is derived from rental income. Therefore, the credit quality of the tenants and the structure of the leases is critical to the ongoing performance of the property and determining its future value. As some properties may be leased by more than one tenant, the weighted average lease expiry (WALE) plays a role in the property’s investment value. With a longer WALE, the property is considered a more stable investment.
“Given that the property’s cash flow largely determines the value of the property, Trilogy places significant emphasis on the selection of properties accommodating tenants that meet these criteria”, says David Hogan.
A strong investment manager underpins the success of any investment, in any class. The decisions the investment manager makes impact how the investor’s money is used to generate returns. Traits investors may look for in an investment manager may include:
- Experience: an investment manager’s experience in their market means they should have developed an in-depth understanding of how it works so they’re well placed to make calculated investment decisions in the best interests of investors.
- Discipline: an investment manager’s ability to adhere to their investment mandate, criteria, and representations to investors means that investors benefit from transparency and strong emotional control when making investment decisions.
- Risk management: there are inherent risks with any investment. The investment manager’s ability to identify risks and prepare to overcome them should they present a barrier to success provides added security for investors.
- Staff retention: low staff turnover means that there is more time spent on managing investments than training.
Trilogy’s ability to retain staff members and our long-term experience as investment managers who stick to a disciplined process is something we’re proud of. Since Trilogy’s inception, we’ve maintained a high degree of staff retention and continuously apply a highly disciplined approach to the management of all our investments.
Most property trusts are geared investments, meaning that to purchase the property some capital is raised from investors with the remainder financed via debt through a bank, secured by a registered first mortgage over the property.
Trilogy’s property trusts are generally geared between 40-50% and we have provisions for re-valuation set out in the PDS and in the constitution governing each trust.
David Hogan says that “Trilogy maintains a close watch on interest rate movements. With past property trusts, we have carried out interest rate swaps to fix the interest rate and minimise the risk exposure for investors”.
If you’re considering an investment in a mortgage trust and you’d like to find out more, speak to Trilogy, an experienced fund manager with a high performing pooled mortgage trust offering. Call 1800 230 099 or email email@example.com. A friendly investor relations team member will be able to assist with any questions you may have.
This article has been prepared by Trilogy Funds Management Limited (Trilogy) ABN 59 080 383 679 AFSL 261425 and provides general advice only that does not consider your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances and we recommend that you seek personal financial product advice on your objectives, financial situation or needs and obtain and read the relevant product disclosure statement before making any investment decision.