People aiming to build their wealth often find themselves tossing up between shares and property. On one hand, shares are an easy-come, easy-go option, with high risks but also high potential rewards. Property, on the other hand, requires more capital but can also promise more stability.
Property funds can offer all the perks of share market investment within the familiar context of bricks and mortar. According to Michael Doble, the head of real estate securities at APN Property Group, property funds allow individuals to pool their money to invest in extensive property portfolios.
“It’s a pooled investment created in a trust structure that private clients can invest in with small denominations, as little as $500, to gain exposure to a professionally managed portfolio ,” he says.
There are two types of property funds: listed and unlisted. A listed fund is registered on the stock exchange. Investors can publicly buy and sell their entitlements, known as ‘units’, just like any other stock, according to Tim Mackay from Quantum Financial.
Generally, this type of fund will be made up of Australian real estate investment trusts, known as A-REITs.
“A-REITS are listed securities that invest in property assets that are available to be invested in on the Australian Securities Exchange (ASX),” Mr Doble explains.
Investors get a return on investment in the form of distributions from the fund. As the properties generate rental income, this is passed back to the shareholders, Mr Doble says.
In addition, the value of the investors’ units may grow. Mr Doble says that a number of factors influence the price of these investment units, including the value of the properties in the fund, the fund’s earnings, its distributions and net tangible assets.
An unlisted property fund, on the other hand, is a private trust that allows investors to buy into major property development projects or portfolios, according to Matthew Callahan, head of retail funds at Open Corporation.
Investors buy shares directly from the developer or owner’s trust rather than through the exchange market.
“An investment of $25,000 would mean the investor has 25,000 units in the trust and is entitled to a percentage of the profits once the property development is completed,” Mr Callahan says.
Property funds versus direct investment
Buying into a major property portfolio can offer some distinct benefits over buying property directly.
Firstly, Mr Doble believes property funds allow investors to spread their capital across several assets.
“Fundamentally, diversification should be the number one objective of every investor. You need diversity in your portfolio to manage risk,” he says.
Property funds also provide higher liquidity with lower transaction costs, Mr Mackay believes.
Investors do not have to pay stamp duty, agent’s fees, marketing fees or capital gains tax when selling their share of a property fund. In addition, if investors need cash, or see a better investment opportunity, they can sell their units and move on quickly
“To buy and sell a property, if you're continually doing it, the transaction costs alone can really start eating into your overall returns. Whereas to buy and sell in a listed fund is reasonably quick and reasonably cheap too,” Mr Mackay says.
In Mr Doble’s view, a further benefit is the ability to buy into a large, well-established portfolio managed by professionals.
“If you’re investing in a managed fund with many other like-minded investors, you are part of a larger pool that can participate in investments that only professional investors get exposure to,” he says.
At the same time, the entry price is low enough to allow investors with limited cash assets to buy into commercial projects.
“You can invest as little as a couple of thousand dollars and have exposure to that portfolio, whereas you would need a couple of million dollars to buy into a commercial property investment,” he says.
Finally, for investors interested in development opportunities, Mr Callahan suggests property funds can be a more secure option.
“Going it alone by investing in your own property development can have pitfalls, with many ‘moving parts’ that can quickly turn your development into a losing proposition if you lack the experience,” he warns.
“Property funds give everyday investors the opportunity to invest in developments usually available only to high net worth individuals or wholesale investors.”
Drawbacks of property funds
No investment is risk-free and property funds do have some drawbacks when compared to traditional property investing. Firstly, this type of investment is more volatile than buying a house directly.
Mr Mackay says the typical property owner is unlikely to revalue their property more than once a year. With property funds, on the other hand, the investor’s units will be revalued on a real time basis as the stock market moves.
“There will be a lot more movement or volatility in the indirect route rather than by the direct route,” Mr Mackay says.
Another issue may be loss of control. Investors in real property can make decisions about every aspect of their portfolio, from choosing the location to picking the carpet.
“When you put your money into a managed fund, what you’re actually saying to the manager of that fund is ‘you’re the expert, you look after it’. If you believe you’re capable of doing it better than that manager, you’re losing that control,” Mr Doble says.
Should investors consider unlisted funds?
Mr Callahan believes unlisted funds can be a great way for investors to tap into major projects.
“In the context of direct property development the benefits are many, including investing smaller amounts (as little at $20,000) to participate in property developments that would, financially speaking, be out of reach for everyday investors,” he says
In particular, he favours development opportunities where investors can buy in with a one-off payment.
“Look for property development opportunities, where you make a ‘one time’ investment in the development with capital and profits returned at the end of the project. The advantage to investors is they will not be faced with the prospect of investing additional funds in the coming months and years into the project,” he says.
Mr Mackay says investors looking into unlisted options need to ensure the funds are liquid and could survive a downturn.
“It's invariably easy to get your money in but if things turn bad, as we saw through the GFC, they can fall over or be frozen. So the liquidity of unlisted funds can be a real thing to keep an eye on,” he says.
Getting involved in property funds
Property funds may seem complicated, but buying into one can be as simple as downloading a form, Mr Doble explains. Self-managed super funds can also take advantage of this type of investment.
“It works just like any other investor. The super fund completes an application form, transfers its money and gets its units,” he says.
Unlisted funds are harder to access because they are not listed on the ASX. Mr Callahan suggests investors do their research to identify a reputable firm with a history of development.
“Investor expos and forums are a good place to start, as is a web search. It is important to undertake your own due diligence on a prospective developer and ensure they have the expertise and experience to complete a successful development,” he says.
Property funds can be an alternative for investors wanting access to a larger scale of investment. An investor with a few thousand dollars could put down a deposit on one cheap property or invest in a small share of hundreds of properties throughout the country.
Ultimately, your investment goals and appetite for risk will determine whether property funds would work for you.