beyond institutional investment
8 March 2018
| Category - Advisory

Beyond institutional investment

The pros and cons of investing in unlisted commercial property funds

In the modern world of finance, safety is an illusion.

The royal commission into financial services is likely to prove this point in spades, and it’s growing increasingly obvious to people in the industry, the only cure is for the Australian public to be more proactive and informed about managing their finances.

The good news is, we live in a world of global opportunity and information so the power is in your hands to take control of your finances and invest in growing your wealth to secure your future.

Self-managed super funds, traditional super funds – industry or retail, cash, bonds, stock, managed funds and residential property, are some of the well-known investment options.

Less known are the “outliers” like small unlisted commercial property funds.

Unlisted Commercial Property Funds have been one of the best performing asset classes in the last 3-5 years, consistently returning 8-10% cash returns annual compared to 2 – 2.5% from banks, 7% for retail managed funds and shares over the same period (past performance is not an indicator of future returns). For more information review this article from the AFR

 

Invest in what you know

It’s no coincidence that the majority of investors in unlisted commercial property funds have a background in real estate or owning commercial property.

But that doesn’t mean that the average investor can’t inform themselves enough to understand the risks, pros and cons of unlisted commercial property funds.

Essentially the same general principles of residential property investment apply – the location, quality of property, quality of the tenant, lease term, income, depreciation and potential for capital gains are all things you should consider. However, like residential property investment, returns are not guaranteed.

So what is an unlisted property fund?

An Unlisted Property Trust is a fund in which a Trust structure has been created to act as the legal owner of a property on behalf of its investors. The fund manager makes decisions on behalf of investors who, like a listed property or management fund, purchase ‘units’ in the Trust. Unlike a listed property fund, units in unlisted property trusts are not as ‘liquid’ but can be sold to other investors. There is no established secondary market for unlisted property trust units.

What are the advantages of an unlisted property fund?

Unlisted property funds pool money from a number of investors, which means the trust can purchase bigger, more expensive assets than an individual investor could.

Under the trust structure, your exposure is limited to the amount you invest.

Fund managers are responsible for managing the finances and property management, including retaining and attracting tenants and paying expenses removing you from the day to day demands of property ownership and paying expenses. Most unlisted commercial property funds pay cash return dividends monthly, every second month or quarterly.

During the term of ownership, the capital value of the property may increase, and in that event unit owners can expect to receive equivalent pro-rata gain in their unit value at the time of sale. Of course, if the capital value of the property were to decrease, unit holders would experience a pro-rata capital loss.

 

 

What is a wholesale investor?

Wholesale investors are investors who usually have the financial resources to allow them to take a long-term approach to their investment decisions.

Unlisted property funds like those offered by Stronghold, involve the purchase of a property that will be held in trust for at least 5-7 years before being resold.

To qualify as a wholesale investor, an investor needs to comply with one of the four categories summarised below:

  • make an investment of $500,000 or more in a trust; or
  • if investing less than $500,000, provide a certificate from a qualified accountant, obtained within the prior two years, that he or she has net assets of at least $2.5m or has had a gross income for each of the last two financial years of at least $250,000; or
  • not be a small business (as defined in the Corporations Act); or
  • be a “professional investor” (as defined in the Corporations Act).

 

With opportunity comes risk

Investing in commercial property is not without risk. Some of the risks to consider include:

A fall in property income

If a Trust’s revenue decreases as a result of deteriorating rental demand, decreasing rent payments, increasing tenant incentives and/or tenants defaulting, this could have a negative effect on distributions to Investors and the value of the Property.

A fall in property value

A downturn in the property market or a fall in property values will have an adverse effect on the value of the Trust and the return to Investors

Vacancy risk & leasing incentives

If a property is untenanted, it will not be earning income and attempts to re-let the property incur expenses in marketing and lease incentives, reducing returns to investors.

Capital expenditure

Capital expenditure, may result in increased funding costs and the Manager may need to reduce distributions to allow for increased costs.

Uncontrollable events

Natural phenomena may affect the Trust property. There are events including certain force majeure events and terrorist attacks for which insurance cover is not available or the Trust does not have cover for. This may result in a loss of capital which may affect returns.

Liquidity risk

In general, the property asset class is an illiquid investment. Investment in the Trust is similarly an illiquid investment. Transfer of an equity investment, if applicable, prior to the divestment of the Property can be difficult and conditions apply.

Finance & interest rate risk management

Most Trusts will borrow funds against the value of the Property. This investment structure creates leverage which increases the potential for capital gains and losses. Having borrowings secured against the Property increases the risk and return parameters.

Changes in the overall interest rate (which includes a bank margin or line fee plus base interest rate) during the Trust term may affect Investors’ returns.

 

How to pick a good fund

Like any investment, picking a “winner” is about research, research and more research.

The first consideration is the asset itself.  Is it in a good location, is it in good repair, does it have good tenants, how long are the lease agreements for, is the purchase price relative to the market?

Understand how your fund manager will manage the leasing, what are the obligations of the commercial property owner to its tenants and how much has been set aside to maintain the building and manage vacancies?

Learn more about the key people behind the fund. What is their experience, how are they qualified?

The trustee of managed fund must also hold an Australian Financial Services License (AFSL) issued by ASIC. The AFSL enables the Trustee to act as the trustee of the Trust and to manage the day-to-day activities of the Trust in accordance with its AFSL, the Corporations Act and the Trust Constitution.

Ensure the fund managers have also used third parties to independently verify their assumptions. Find out which memberships the company has with industry groups.

Finally, before investing, make sure you read the information memorandum and any paperwork carefully. The Information Memorandum should provide details about financing, fees, trust structures and subscription terms and conditions, terms of investment and exit. You should also consult with your accountant, financial planner, solicitor or other suitably qualified professional advisor.

“This advice is general advice, not personal advice so you can’t assume it will be suitable for you. It does not take into account your objectives, financial situation or needs so you will need to consider if the advice is appropriate for you.”

 

View our current opportunities

Stronghold Hospitality Property Trust No 14; Open for investment

Mulgrave Property Trust No.11

For a copy of the STRONGHOLD HOSPITALITY PROPERTY TRUST NO. 14
INFORMATION MEMORANDUM or INVESTMENT SUMMARY please contact Steve de Nys on 0413 515 808 or email sdenys@strongholdinvest.com.au