Alternatives for Property Fund Investors
Property Funds provide an alternative way to invest in real estate without having to own the individual property directly. These Funds seek to pool multiple investors in either a trust or company to acquire one or more properties.
Investors in these funds receive the benefits of diversification with a lower capital requirement and professional management. In addition, investors don’t need to worry about the day-to-day hassles of managing an asset, such as negotiating lease terms or overseeing various expense payments. In return for these benefits, property fund investors are required to pay the Fund Manager an ongoing fee, which is typically calculated as a percentage of the Fund’s gross assets.
Unlisted Property Funds and Property Syndicates
Unlisted Property Funds (also referred to as Property Syndicates or Direct Property Funds) are the closest alternative to owing an individual property directly. A Property Syndicate pools money from individual investors, along with borrowings from the bank, to buy property and share the rental income. Investors in the syndicate buy units or shares in the fund that represent a portion of the property. The number of units available depends on the price paid for the property and the number of investors in the fund. The initial minimum investment will vary for each fund, but is typically about $50,000. Investment returns are based on the property’s net rental income, minus the costs the syndicate needs to pay.
The performance of the fund is directly impacted by the underlying performance of cash flows and values of the assets in the Fund, and the skill of the manager to manage the Funds capital. Investors receive these returns in the form of fund distributions and changes in the unit price.
Direct Property Funds have evolved over time to also include more active types of investments such as property development and property repositioning. These more active funds typically aim to provide investors with a capital growth style return rather than ongoing income.
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One main drawback of Unlisted Property Funds is their lack of liquidity. This illiquidity is because it takes to sell property, which may be inconsistent with the demands of investors to withdraw from the fund. In response to this issue there also exists Real Estate Investment Trusts (REITs), which are listed on the ASX and are seen as a substitute for direct property investing, with enhanced liquidity.
As with Direct Property Funds, REITs aim to invest in commercial property directly and pool money from individual investors, along with borrowings from the bank, to buy property and share the rental income. However, these Funds offer superior liquidity benefits, as they trade on a liquid market with buyers and sellers actively transacting during the course of each day.
Overtime, the Australian REIT sector has evolved to now also include stapled trusts which also undertake other activities such as funds management, property development, and mezzanine finance. These changes, coupled with the impact of the broader sentiment in the stock market, have resulted in the performance of REITs resembling a hybrid of listed shares and direct property.
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