Australia’s unlisted property trust sector has produced consistent above-average yields and capital growth over a long period, making it one of the most reliable asset classes available to retail investors and SMSF trustees.
According to research prepared by property fund manager Charter Hall Group, an investment of $100 in Australian commercial property in 2001 would have increased in value to $446 by the end of last year.
An investment of $100 in the Australian sharemarket would have grown to $321 over the same period (as measured by the MSCI Australian Equities Index).
Exposure to commercial property (commercial, retail and industrial real estate) can be gained in a number of ways but mainly through listed or unlisted property trusts.
Listed trusts offer the advantage of liquidity but can be more volatile, as their unit prices can move in line with overall market sentiment and not just changes in the value of underlying assets.
Unlisted trusts may have a fixed investment term but they tend to provide a more consistent return.
According to Charter Hall’s data, listed property trusts were exposed to the bear market that started late in 2007 and ran through to early 2009. As a result, an investment of $100 in the listed trust index in 2001 would have only grown to $252 by the end of last year – a lower return than the overall commercial property market return.
According to Property Investment Research, over the five years to the end of 2016 unlisted property funds available to retail investors produced an average return of 7.9 per cent a year.
The average income yield from an unlisted property fund available to retail investors was 5.9 per cent last year, which was ahead of the listed trust average of 4.5 per cent.
Volatility is extremely low. Australian equities have a long-term standard deviation of around nine per cent, which means returns can vary from the average by as much as nine per cent (up or down) in any given year. Based on Charter Hall’s data, Australian commercial property has a standard deviation of less than one.
According to Atchison Consultants, over the 10 years to December last year unlisted property funds have produced an average total return of 8.1 per cent a year, with volatility of 3.2 per cent.
The income return over the same period has been 6.9 per cent a year, Atchison says.
The volatility data varies but it is clear that unlisted commercial property funds offer above-average yield, good capital growth, diversification and the defensive characteristic of low volatility.
Atchison Consultants says the worst annual return for unlisted property over the 10 years was a fall of seven per cent, compared with a fall of 38.6 per cent for Australian shares in one year, 25 per cent for international shares and 57.8 per cent for listed property trusts.
The biggest fund managers offering unlisted property trusts for retail investors are Charter Hall Goup, AMP Capital, Australian Unity, Centuria, Cromwell Property Group and Elanor Investors Group.
PIR says the sector’s balance sheet management remains conservative following the financial crisis, which saw some overly indebted property fund managers get into trouble.
Average leverage (debt to equity) for the sector was 26 per cent at the end of last year, down from 29 per cent in 2015 and well down from the peak of 42 per cent in 2009.
Average lease expiry for unlisted retail funds at the end of last year was 5.6 years, according to PIR.
PIR’s conclusion is that commercial property offers mid to high single-digit yields, consistent multi-year income streams and high single-digit total returns.
A risk with such investments is that when interest rates do start to rise again, investors may move some of their money out of property and into cash and fixed income investments, and this may have a negative impact on asset values. However, PIR sees the current environment as supportive of the sector, with expectations that interest rates will remain low.
An ongoing shift to high-yield assets is also supportive of the sector.
As to diversification, Charter Hall has calculated a correlation of 0.12 between Australian commercial property and Australian equities. A correlation of one means the two asset classes are perfectly correlated and will move in step with each other. A correlation of 0.12 is low.
Another attraction of unlisted property trusts is that they may receive favourable treatment under Australian tax law. According to the Property Funds Association, investors will often receive tax-deferred distributions through asset depreciation benefits, meaning only a portion of the distribution will be required to be declared as taxable income in the year it is received.