Understanding listed A-REITs
What is an A-REIT?
A-REITs, (also known as a Listed Property Trusts) allow investors to purchase an interest in a diversified and professionally managed portfolio of real estate, mostly commercial property. Property trust investors gain exposure to both the capital value of the assets, and the rental stream derived from the properties. This allows exposure to real estate without the normal operating issues such as maintenance, administration, collecting rents, and supervising improvements.
Most A-REITs include a portfolio of properties, spread across various geographic regions, lease lengths, and tenant types, although there are some single property and/or tenant trusts. Examples include companies like GPT Group or Mirvac.
Types of trusts listed include:
- Industrial – investment in warehouses, factories, and industrial parks.
- Office – investment in large to medium scale office buildings and parks, both located in CBD’s and secondary locations.
- Retail – investment in shopping centres, malls, cinemas, and other shopping related real estate.
- Alternative Sectors – recently we have seen the growth in specialised alternative sector A-REITs which own assets such as hospitals, childcare, pubs, self-storage facilities, and service stations.
- Diversified – investment in a mixture of the above sectors.
Property trusts may adopt one of two structures:
- Stand-alone trusts or companies providing investors pure exposure to the underlining real estate portfolio.
- Stapled securities providing investors exposure to a funds management and/or property development company in addition to a real estate portfolio.
In Australia REITs are often referred to as A-REITs, and Australia’s model for REITs is a recognised world leader. From less than $5bn in the early 1990s, the sector now has a market capitalisation of $131bn in 2018.
Internal vs Internal Managed REIT Structures
A-REITs operate under one of two distinct business models. The first and the more traditional approach has been the external model.
The external model comprises of an external management entity that manages the Trust on behalf of unitholders. The manager in this structure is generally termed a ‘responsible entity’. Notwithstanding that the responsible entity (RE) may hold a stake in the Trust, for all intents and purposes, the RE is a separate legal entity.
The RE charges a management fee that may or may not include a performance fee for providing a suite of management services to the trust including: property management, acquisitions/dispositions, as well as capital management services. The external RE structure was up until 2003/4, the dominant operating model within the sector.
The alternative business model is to operate under an internal structure whereby management costs and overheads are charged out by the Corporation to the Trust, with both the Corporation and the Trust contained within the one legal entity. Under the internal model there is a legal and interrelated link between the manager and the Trust. This structure is generally described as a stapled structure.
A stapled security is where investors own two or more securities that are generally related and bound together through one vehicle. Typically, stapled securities consist of one trust unit and one share in the management company that cannot be traded separately. The trust holds the portfolio of assets while the related company carries out the funds management and/or development opportunities.
For more information on different types of property funds see here.