What to Look for in Your Next Unlisted Property Trust Investment

For many years, Australians have embraced direct property ownership to secure their financial future.

Given the property market cycle and historically low interest rates, residential property is still highly preferred despite values contracting in some markets.

However, unlisted property trusts, also known as property syndications, have gained popularity as an investment vehicle.

Investors pool their money by investing in units in the property trust which will then purchase income producing property. The syndication structure provides direct access to commercial property (which they may not have had the resources to purchase on their own). The legitimacy of property trusts has been reinforced over the past few years following their strong performance in key sectors.

Many investors consider investment in a property syndicate as an opportunity to diversify into commercial real-estate and provide additional value to help them achieve their financial objectives.

A professional investment manager, like Trilogy, leverages their investment skills and experience to source properties that meet the trusts’ investment criteria. The investment manager is then responsible for the trust’s investment performance.

To help you decide whether a syndicated property trust may be suitable for you, we’ve compiled a simple list of characteristics to look for when considering investment.

Property type

The type of property that forms the asset of the trust plays a large role in it’s stability and performance. Property types may typically include commercial, retail or industrial properties. Each carries its own risks and benefits.

Trilogy’s head of property assets, David Hogan, says that Trilogy has focused for some time on commercial office and industrial property.

“We carefully consider factors including geographic location, size, lease terms, tenant quality, any changes in technology or infrastructure, social and business trends and supply and demand," Hogan said.

Liquidity

An investment in an unlisted property trust is an illiquid investment which means your investment may not be withdrawn for a period up to 10 years, depending on the term of the trust.

As an investor, you should consider your requirements for having cash-at-call, should you require it in the future and always review the product disclosure statement (PDS) for the trust to find out about the investment manager’s terms for withdrawal.

While this period of time may seem daunting, it’s important to remember the reason for this longer-term approach is so that investors may benefit from the increase in the income as a result of annual rent reviews, with this compounding figure usually reflected in an increase in capital value.

Distribution yield

Distribution yield is the income paid to investors and is expressed as an annual percentage rate, paid either monthly, quarterly, half-yearly, or annually.

For a property trust, the distribution yield is derived from the rental income generated by the property. As many property trusts are closed, the distribution yield is paid as a distribution to your nominated financial institutions account.

Tenants

The distribution yield paid to investors in a property trust is derived from rental income. Therefore, the credit quality of the tenants and the structure of the leases is critical to the ongoing performance of the property and determining its future value.

As some properties may be leased by more than one tenant, the weighted average lease expiry (WALE) plays a role in the property’s investment value. With a longer WALE, the property is considered a more stable investment.

“Given that the property’s cash flow largely determines the value of the property, Trilogy places significant emphasis on the selection of properties accommodating tenants that meet these criteria”

David Hogan, Trilogy head of property assets

Management

A strong investment manager underpins the success of any investment, in any class. The decisions the investment manager makes impact how the investor’s money is used to generate returns.

Traits investors may look for in an investment manager include proven experience in their market, a disciplined nature that adheres to their investment mandate, criteria and representations to investors and an ability to identify risks and prepare to overcome them should they present a barrier to success.

Gearing

Most property trusts are geared investments, meaning that to purchase the property some capital is raised from investors with the remainder financed via debt through a bank, secured by a registered first mortgage over the property.

Trilogy’s property trusts are generally geared between 40-50 per cent with provisions for re-valuation set out in the PDS and in the constitution governing each trust.

“Trilogy maintains a close watch on interest rate movements," David Hogan said.

"With past property trusts, we have carried out interest rate swaps to fix the interest rate and minimise the risk exposure for investors."

If you’re considering a property trust for inclusion in your investment portfolio, learn more about property trusts or get in touch with the Trilogy team to chat more about past and upcoming investment opportunities.

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