This article is part 2 of a 3 part series on commercial property and unlisted property funds in Australia, provided by Cromwell Property Group’s Head of Retail Funds Management, Hamish Wehl.

Purchasing a property asset directly is a method commonly used for residential property investments. However, with commercial property, this is usually an unfeasible approach for the everyday investor as it can be highly expensive, limit diversification, and lead to an extremely high-risk profile for an individual investor.

A more accessible and cost-friendly approach for investors to access commercial property is through private syndicates, ASX-listed Real Estate Investment Trusts (A-REITs), or unlisted property funds. 

Private Syndicates

Private syndicates are when a group of investors club together (either privately or with the help of a manager) to pool their money and buy property. This type of investment generally requires a high level of investment by each investor. There is often no way to exit the investment without finding another buyer and unless there are significant sums to invest, portfolio diversification can be limited.

A-REITs

For investors looking to spread risk across a wide range of property sectors, types, and geographical locations, A-REITs can provide a good solution.

Australian Real Estate Investment Trusts (A-REITS) are professionally-managed portfolios of listed properties which can change over time as the manager looks to improve the portfolio. However, as they can be traded openly on the ASX, the value of A-REITs moves with broader equity market sentiment, which can cause the value of the investment to be more volatile than a direct investment in property.

Unlisted Property Funds

Professionally-managed unlisted property funds are an alternative way to invest in commercial property. 

As their prices are based on the underlying valuation of their property assets and not directly influenced by the equity market, their price volatility is lower than A-REITs. They can also provide additional portfolio diversification benefits, as the returns are not highly correlated to equities.

There are two key types of unlisted property funds. Open-ended property funds do not have a finite maturity date and can continue to issue units so long as they raise money to purchase additional properties. These funds usually hold some cash to provide liquidity to existing investors.

The other type of unlisted property fund is fixed-term or closed-ended syndicate. Assets are generally held for five to ten years, at the end of which investors in the syndicate can vote on the future of the trust. The default outcome is usually that the asset is sold, the trust is wound up and investors are paid out. These are generally illiquid investments and investors must commit their funds for the full investment term.

Continue reading part 3 on unlisted property funds here.

Hamish Wehl – Guest Contributor

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