Jason Huljich outlines what to look for in a property to maximise the chance of sound long-term performance.
With continuing volatility across equities and uncertainty surrounding the values of residential property in particular, it may surprise some to know that there have been strong recent inflows to unlisted commercial property investments. And, despite some of the unarguable issues of the recent past, there are very good reasons for this.
A sound, well-managed unlisted property investment provides the benefits of growth, income and genuine diversification to the portfolio. It’s just a matter of knowing what to look for.
In an environment in which equity markets in particular remain volatile, it’s not surprising that many investors are feeling uncertain when making investment decisions and choices.
If they stay too invested in equities, they run the risk of continuing to go sideways – or the worst case, backwards. Staying in, or moving to, cash – the favoured post-GFC “safe haven” – is no longer looking so appealing, given the predicted rises in inflation and decreased rates on offer from the banks.
Also uncertain in the current environment is a move to residential property, with rates high and values slipping in major capitals. An alternative is property investments – in syndicated commercial property – but we suspect a number of issues might lead to investor hesitance.
‘Also uncertain in the current environment is a move to residential property’
Sharing this conundrum are the many advisers who are trying to meet the dual aims of guiding clients through the current uncertainty, while simultaneously securing their long-term positions.
Those advisers might be well served by taking another look at what’s happening in commercial property, and syndicated unlisted property in particular. The virtues of an appropriate syndicated commercial property investment are well understood: benefits such as duration of quality tenants providing stability of income; flexibility of tax treatment; low or no requirement for day-to-day management on the part of adviser or client; and long-term capital growth.
What’s less well understood is the increasing difference in return characteristics between the listed and unlisted vehicles; and, once a considered decision to invest is made, what are the hallmarks of a worthy unlisted property investment.
First, let’s look at the difference between listed and unlisted investments. In recent years, there has been an increasing correlation between listed property trusts (LPTs) – or Australian Real Estate Investment Trusts (AREITs), as they are increasingly known – and equities. Many commentators now put LPTs in the same “basket” as equities – in practice, it has become clear that the fortunes of a listed property trust can be equally affected by swinging market sentiment as for a listed company.
The fortunes of unlisted property on the other hand are far more closely correlated to the hard reality of the value and returns of the underlying assets, when capital gains can be reflected directly in the net asset backing (NAB) of the fund.
In other words, if it’s a quality, well-managed asset, returns will remain strong and value will increase – regardless of how the index is faring. As too many investors have found out, the same principle applies to poor-quality, mismanaged assets with overinflated values and excessive gearing. Unfortunately, this latter scenario has been an acknowledged shortcoming of the unlisted property sector in recent times.
However, times are certainly changing. The post-GFC fallout has led to a major consolidation and review of practices in the unlisted property sector, and investors can now approach it with increased confidence that, if they choose a quality, well-managed fund, the returns will follow.
Which brings us to the big question: how do you identify a quality, well-managed fund?
First and foremost, this comes down to the experience, track record and bona fides of the manager, from whom all of the major decisions affecting the fortunes of the investment will flow.
Hallmarks of a good manager – and hence, a good fund – are listed in the box, left.
In short, if an unlisted manager can show both a demonstrated commitment to investor rights and a clear, strong capability of performance, then investors are likely to enjoy the full degree of unlisted property’s considerable – and in many pockets untapped – potential.
Jason Huljich is the chief executive officer of Centuria Property Funds.