Property Fund Investment: A Guide To Getting Started

Investing in property is often seen as a less risky option than other forms of investment. However, while it may seem more straightforward, there are some pitfalls to be aware of. One option for those looking to invest in property is to buy 'units' in a property scheme or fund. This allows investors to pool their money with other investors to invest in property assets, such as commercial, retail or industrial assets. There are two types of property funds: listed and unlisted. A listed fund is registered on the stock exchange, while an unlisted fund is a private trust. Investors can buy shares directly from the developer or owner's trust. Property funds can offer the perks of share market investment with the familiarity of bricks and mortar.

Understanding property schemes

Property schemes, also known as property funds, are a way to invest in property without the need for a large capital outlay. They are typically managed by professional investment managers who pool investors' money to invest in property assets. These assets can include commercial, retail, or industrial properties, and may also involve property development.

There are two main types of property schemes: listed and unlisted. Listed property schemes, also known as property trusts or real estate investment trusts (REITs), are traded on public markets such as the Australian Securities Exchange (ASX). They offer greater transparency in terms of valuation and are easier to buy and sell. On the other hand, unlisted property schemes are private trusts that are not traded on public markets, making it more difficult to determine the value of your investment and exit the investment.

When investing in a property scheme, it is important to understand the risks involved. These can include construction and development risks, as well as the financial stability of the scheme. Investors should carefully review the product disclosure statement (PDS) to understand the features, risks, fees, and management of the scheme.

Property schemes can offer benefits such as diversification, lower transaction costs, and access to a professionally managed portfolio of properties. They can also provide regular income through distributions and the potential for capital gains. However, it's important to remember that property investments may be less liquid than other investments, and there may be restrictions on withdrawing your money from unlisted property schemes.

Overall, property schemes provide an opportunity for individuals to invest in the property market without the burdens of direct property ownership. They offer diversification, professional management, and access to a wide range of property assets. However, it is crucial to carefully assess the risks and understand the features of the specific property scheme before making any investment decisions.

Pros and cons of investing in property

Pros of Investing in Property

• Less volatility: Property can be less volatile than shares or other investments.
• Income: You can earn rental income if the property is tenanted.
• Capital growth: If the property increases in value, you will benefit from a capital gain when you sell.
• Tax deductions: You can offset most property expenses against rental income, including interest on any loan used to buy the property.
• Physical asset: You are investing in something tangible that you can see and touch.
• No specialised knowledge required: Unlike some complex investments, you don't need any particular specialised knowledge to invest in property.

Cons of Investing in Property

• Cost: Rental income may not cover your mortgage payments and other expenses.
• Interest rates: A rise in interest rates will mean higher repayments and lower disposable income.
• Vacancy: There may be times when you have to cover the costs yourself if you don't have a tenant.
• Inflexibility: Property is an illiquid asset, meaning you can't sell off a part of it if you need to access some cash in a hurry.
• Loss of value: If the property value goes down, you could end up owing more than the property is worth.
• High entry and exit costs: There are various expenses associated with buying and selling property, such as stamp duty, legal fees, and real estate agent's fees.

Listed vs unlisted property funds

Property funds are generally offered in two forms: listed or unlisted. Both types are based on the pooling of funds to buy commercial real estate for investment returns, but they have key differences and will offer varying benefits and drawbacks to investors.

Similarities

Both listed and unlisted property funds work in similar ways in that investors contribute capital in return for a share of the assets held by the fund. The assets are operated by a professional fund manager, who is responsible for selecting the investment properties, monitoring their performance, and the ongoing administration of the fund. In return for their investment, investors may receive a regular income, or 'distributions', and a capital gain on their original investment.

Listed Property Funds

Listed property funds, also known as "Australian Real Estate Investment Trusts" (A-REITs), are listed on the Australian Securities Exchange (ASX). Investors are issued securities that can be traded on the ASX through a stockbroker, providing a secondary market for investors and high liquidity. Investors can buy and sell their entitlements, known as 'units', publicly just like any other stock. The value of these units is influenced by several factors, including the value of the properties in the fund, the fund's earnings, its distributions, and net tangible assets.

While this can be a positive for experienced investors, there are also negatives to being listed on the ASX. The value of securities can be subject to more volatility, driven by changes in market sentiment and general perceptions of the underlying assets' worth. In addition, dividends tend to be paid less frequently, typically bi-annually, requiring greater cash flow management from investors.

Unlisted Property Funds

Unlisted property funds, on the other hand, are privately held and are not listed on a secondary (public) market. They bear greater similarity to direct investment, as investors gain direct exposure to the fund's underlying assets. Investments in unlisted funds are usually secured for the duration of the fund period, offering lower liquidity but generally less volatile unit prices based on the capital value of the underlying assets. Unlisted property funds also typically offer investors greater control over their investments, with voting rights apportioned relative to each investor's interest in the fund. Investors will generally receive distributions more frequently, benefiting those seeking greater regularity of the income stream.

In conclusion, the choice between listed and unlisted property funds depends on an investor's goals and risk appetite. Listed funds offer higher liquidity and easier valuation and exit options, but come with more volatility and less frequent dividend payments. Unlisted funds, meanwhile, provide more stable unit prices, greater control, and more frequent distributions, but have lower liquidity and can be challenging to exit early.

Property funds vs direct investment

Property funds and direct investment are two distinct ways to enter the real estate market, each with its own advantages and drawbacks.

Property Funds

Property funds, also known as real estate investment trusts (REITs), allow individuals to pool their money and invest in extensive property portfolios. This type of investment offers diversification, as it spreads capital across multiple assets, often in different locations and property types. This mitigates risk, as underperforming assets are balanced by more successful ones. Property funds also provide higher liquidity and lower transaction costs, as investors can sell their units quickly and move on. The entry price for property funds is typically lower, making it more accessible to investors with limited capital. Additionally, property funds are managed by professionals, allowing investors to benefit from their expertise.

Direct Investment

Direct investment in real estate involves the purchase, ownership, rental, management, and/or sale of property for profit and returns. This approach gives investors more control over decision-making, allowing them to tailor their investment strategy to specific property types and markets. It also offers the potential for higher returns, as investors can capture the full rental income and value appreciation. Direct investment may provide more tax breaks than REITs, and investors can take advantage of tax deductions on expenses.

The choice between property funds and direct investment depends on individual circumstances, investment goals, and risk tolerance. Property funds offer a hands-off approach with lower risk and greater diversification, while direct investment provides more control, higher potential returns, and tax advantages.

Drawbacks of property funds

While property funds can be a great investment option, they do come with certain drawbacks that potential investors should be aware of. Here are some of the key disadvantages to consider:

• Volatility: Property funds are more volatile than buying a house directly. The value of an investor's units in a property fund will fluctuate in real time as the stock market moves, leading to greater volatility compared to direct property investment.
• Loss of Control: Investing in a property fund means entrusting your money to a fund manager, resulting in a loss of control over investment decisions. While fund managers are experts, some investors may prefer the autonomy of making their own choices.
• Liquidity: Property funds, especially unlisted funds, may face liquidity issues during a market downturn. Unlisted funds, in particular, are not traded on public markets, making it challenging to withdraw money early and potentially subjecting investors to strict conditions and fees.
• Costs: There are various costs associated with property funds, including management fees, transaction costs, and potential capital gains tax. These expenses can impact overall investment returns.
• Risk: While property funds offer diversification and professional management, they are not risk-free. The performance of property funds depends on various factors, including the underlying properties' performance, market conditions, and the expertise of the fund managers.
• Limited Accessibility: Unlisted property funds are harder to access since they are not listed on public exchanges. Investors need to conduct thorough research to identify reputable firms with a successful track record in property development.

Frequently asked questions