Listed and unlisted property trusts offer investors different incentives

The decision by ASIC to enforce tougher disclosure requirements on the unlisted property sector has thrown the spotlight on the options for investors looking to include property in their portfolios.

According to David Curtis, portfolio manager at A-REITs specialist Reliance Investment, “current market dynamics” dictate that A-REITs are appealing, particularly to retail investors.

“Ultimately, pricing is the biggest reason,” he says.

“You can buy any number of REITs from big, well-known companies (Westfield, GBPT, Dexus, etc) at a reasonable discount to underlying asset backing. This gives investors a little bit of comfort because they’re buying something they know is worth ‘X’ at only 0.8 of ‘X’”

Criticism of A-REITs as a preferred investment vehicle has come from ASX-listed fund manager Centuria, which claims that listed property trusts do not offer much in the way of diversification and are risky.

Curtis disagrees.

“Absolutely, this was the case during the GFC when A-REITs traded like a general equity, but it’s no longer true.”

Curtis says the “beta profile” of A-REITs, which measures volatility, was very similar to the broader equity sector during the crisis, but this has now changed considerably.

“Beta has gone from 1, when it was trading in line with equities, to 0.5, meaning it is now half as volatile as the broader equity market,” he says.

According to Curtis, a big brand A-REIT like GPT, which makes up about 8% of the total A-REIT sector by market capitalisation, offers retail investors access to one of the best-quality, most diversified portfolios in the country.

On the other hand, he contends that retail investors who put their money in unlisted trusts would normally only be able invest in one or two asset funds.

“These may have leases with one or two tenants, so they are in fact less diversified, generally speaking than if they’d invested in A-REITs,” Curtis says.

A-REITs are like equities, says Centuria

In his criticism of A-REITs, Centuria CEO John McBain says listed property as an asset class behaves like equities. Centuria’s wholly owned Centuria Property Funds has more than $1 billion worth of property under management in 29 unlisted property funds.

“In tracking the market and the index alongside the equities in the portfolio they provide no real diversification should the share market begin to slide, as recent performance figures show,” McBain says.

In addition to offering little in the way of diversification, McBain claims a second issue for investors is the “volatility of returns” generated by A-REITs, which he says are “far higher than unlisted [property trusts]”.

“High volatility means that total returns can be greatly diminished by poor timing of purchases and sales by investors who make decisions driven by strong sentiment – as we have seen in the current market,” McBain says.

“So, while in the case of listed property an investor might have the perceived benefit of lower liquidity risk, other risks such as correlation with a volatile sentiment-driven index [and] with a poorly performing index may well countervail it.”

On the other hand, McBain says the performance of unlisted property, while to an extent reliant on the broader property market, is also dependent on two more rational and controllable factors: the quality of the underlying core assets and, just as critical, the quality of its management.

“It is far less volatile and, historically, has offered much steadier returns than its unlisted counterpart.

“Unaligned to an index, the right unlisted vehicle can offer investors the benefit of genuine diversification throughout the investment cycle,” he says.

Current performance

A good benchmark of the current performance of the unlisted sector is the Mercer/IPD Pooled Property Fund Index, which tracks the performance of 17 property funds with a net asset value of $37.2 billion.

Over the quarter to June 2011, the index delivered a total return of 2.2%. Over the year to June 2011, total return was 9.8% after gearing and fees. Of this, distributed income was 6.1% and capital return was 3.6%.

Diversified funds were the top performers, with a total return of 10.5% for the year, followed by office sector funds with 9.7%, retail funds with 9.1% and industrial funds posting 8.9%.

Overall, the average annual distribution yield for the core wholesale property sector as at June 2011 remained steady 5.8%, comparing favourably with the 10-year Australian Government Bond rate of 4.7%.

Commenting on the performance of the sector in the June quarter, Anthony De Francesco, managing director of IPD Australia and New Zealand, said the result “confirms a stabilisation in investment performance for the unlisted core wholesale property sector”.

According to Russell Investments, the outlook for REITs is modest, reflecting a stabilising property market.

In its June market report, the investment firm says the Australian listed real estate sector is currently trading an average discount to net tangible assets of -3.3%

Investment should suit the investor

Curtis concedes that there are both pros and cons to invest in either unlisted or listed property trusts.

“A benefit of A-REITs is that they are liquid, meaning you can buy and sell them at any point when the stock exchange is open for trading.

“For some investors this is really important,” he says.

The downside though is that prices do change and some investors don’t like the volatility.

“Others don’t care about volatility. It all comes down to your personal preferences,” he says.

As for unlisted trusts, he agrees with McBain that the price does not move around as much, but the down side is they are illiquid.

“It can be difficult to get your money out if your circumstances change,” he says.

Such circumstances came to fruition during the GFC, when many investors found they could not withdraw their investments due to funds being frozen.

“This is still the case for some unlisted funds,” Curtis says.

At the end of the day, the key is to have a balanced portfolio and be aware of what you are buying.

“At any point, one will be more appealing than other,” he says. At the moment he believes A-REITs have the edge.

McBain disagrees: “Unaligned to an index, the right unlisted vehicle can offer investors the benefit of genuine diversification throughout the investment cycle.”