Investors can invest in commercial property through listed real estate investment trusts (REITs) or unlisted property trusts. REITs are real estate investment funds traded on stock exchanges (listed property trusts). Unlisted property funds are essentially REITs that are not listed. Investors in these funds cannot easily buy more or sell their units after the initial investment.
Unlisted Property Funds vs REITs
We have put together a list of issues to highlight the differences between unlisted property funds and REITs.
Open-ended vs closed-end funds property funds.
Unlisted property syndicates or funds can be structured as to be open-ended or closed-ended investment funds. An open-ended fund property fund allows investors to buy into and sell out of the investment fund overtime.
On the other hand, investors in closed-ended fund property funds will have to remain in the investment through the investment term with limited avenues (liquidity events) to sell the units before the underlying asset is sold at the end of the trust life.
These structures will have a different meaning in the context of where the investor sits.
Retail Unlisted Syndicates
Historically in Australia, unlisted property syndicates are the norm and typically associated with unlisted property funds. Recently there is an increasing shift to open-ended funds for the funds open to institutional investors.
Institutional Property Funds
For institutional investors, close-ended funds are best designed for value-add real estate strategies with a more defined entry and exit shelf life.
Open-ended funds are suited for and aligned with core or core plus strategies where the main focus is long-term income stability and capital appreciation.
It is essential to highlight that only because a fund is open-ended does not mean liquidity will be there when the investor is looking to exit the fund. The liquidity risk at the time of the sale is very much dependent on fund liquidity and incoming investor interest. However, at least investors in these funds have an option if there is sufficient liquidity in the fund or other investors.
Property Fund Mark to Market
Values of unlisted property funds will only change if there is a change in the underlying property value. The marked to market regieme of owning units in an unlisted property fund is very similar for those that own investment or their own homes where the house prices can change overtime, but the changes are only in paper and crystallized only when the asset liquidiated.
Owning a REIT on the otherhand means the daily change in the REIT prices flows through in real time to the value of the investment portfolio. Depending on the terms in the trust’s constitution, the unlisted property syndicate can require the manager to revalue the assets on an annual or pre-set period basis. If the syndicate has bank debt, then the banks will require the asset to be revalued annually. The book value or the unit’s net tangible value in the syndicate flows off the latest independent valuation or the director valuation.
Optically the price of the unit in the property syndicate does not change. Depending on investor circumstances or temperament, it can be considered an advantage.
Setup cost vs buying into the existing portfolio
A downside of buying into a new unlisted property fund at the time of formation is that the investor is bearing all of the setup costs. These costs include the acquisition fee for the sponsor, legal due diligence and stamp duty etc.
When the investor subscribes to the units, the purchase price (either $1 or $2) is at a premium to the fund’s underlying net tangible value.
On the other hand, depending on market conditions, the listed REIT price can trade above or below book value. If buying in at book value, every dollar invested is against a dollar in the property.
Unlisted Property Fund Fees
There are a variety of fees the manager can charge as part of the property fund’s management. Fund’s product disclosure statement will outline all of the manager’s fees, which we highly recommend for any new investors to read before investing.
- Management fee – The management fee covers the ongoing management of the fund. The fee can either be charged as a percentage of the asset’s gross value, for example, 0.75% of the property’s value or on a net asset basis. Investment management fees charged on a net asset basis mean the fees are charged on the fund’s equity.
- Fees on a net asset basis are comparable to fees in equity funds like ETFs, where the manager charges a percentage of investor equity in the fund.
- Indirect costs – Indirect cost measures all of the fees the manager charged the fund. Property funds indirect cost metric is aimed to capture any other fees the manager earned from managing the investment, so the investor has the full picture of fees paid for on the investment.
- One example of fees captured here is the leasing fees paid to the manager if they secured leases in the assets or property management fees the manager earned looking after the property separate from the investment management fee. It is essential to note that a high indirect cost does not mean the overall fees are high.
- For example, leasing fees would usually have to be paid in most instances. If the manager did the deals themselves, they rightly wanted to be compensated for it but if they didn’t do the deal. The investor would still pay that fee to a third-party agent, but it wouldn’t be captured in the indirect cost metric because it is not paid to the fund manager. An artificially high indirect fee could be a result of an internalized management fee structure.
- Fund Expenses are the expenses the manager incurred in running the property fund, such as fund accounting, auditing, and legal fees.
- Performance fee – Agreed formula on the performance fee if the total return is above the agreed hurdle.
- Establishment and placement fee – if the property fund is new and there were capital raising costs, this is captured here.
- Sale fee – some managers can charge a fee to run the sales process and as a percentage of the realized value.
Taxes in Unlisted Property Trusts
For Australian-based investors, income from unlisted property trusts is called distributions, not dividends. Distributions and capital gains are taxed at the individual level.
New Zealand investors in Australia Unlisted Property Trusts distributions have a 15% withholding tax on the distribution from the net taxable income (such as rent and capital gains). Interest income earned is subject to a separate tax rate of 10%.
The taxation information are outlined under an AMIT Member Annual (AMMA) statement, which outlines the components of the attributed income and other relevant taxation information to assist Australian resident Investors with the preparation of their tax returns.
List of Unlisted Property Fund Manager
It is an established market with some of the major players being