Some forumites have mentioned they are investigating LPTs, here's my take on them, The ASX is a good place to do further research.
There are lots of different ways of generating an income after retiring. Investing in LPTs is a popular one. LPTs are Listed Property Trusts. They are a collection of one or more buildings owned by a trust. The trust is listed on the ASX, so it’s easy to buy or sell shares at a moments notice at low cost. The trust is managed by a professional team that handles tenant management, maintenance, upgrades, buying new buildings, vacancies, disputes, just like a residential property manager.
There are 3 main sectors that LPTs invest in – Retail, Industrial and Office. Most LPTs specialise in one of these, but there are some that are diversified across more than one sector.
Advantages
There are lots of different ways of generating an income after retiring. Investing in LPTs is a popular one. LPTs are Listed Property Trusts. They are a collection of one or more buildings owned by a trust. The trust is listed on the ASX, so it’s easy to buy or sell shares at a moments notice at low cost. The trust is managed by a professional team that handles tenant management, maintenance, upgrades, buying new buildings, vacancies, disputes, just like a residential property manager.
There are 3 main sectors that LPTs invest in – Retail, Industrial and Office. Most LPTs specialise in one of these, but there are some that are diversified across more than one sector.
Advantages
- LPTs are relatively high yielding – currently about 7.0%-8.0%pa nett
- Rents (& therefore distributions) are linked to CPI – the income (& capital) grows with inflation
- Some of the biggest holders of LPT shares are Industry Retirement Funds
- They have a well diversified tenants base – often 100’s of tenants
- They have diversified blue chip tenants – eg Telstra, BHP, Big Banks, Woolies, Coles etc
- They have staggered lease expiry dates – low vacancy risk
- They have long term leases - often 10yr+
- They are low risk – the big companies will always need somewhere to work from
- They have low volatility – rent are consistent every month
- They distribute either quarterly or half yearly – you get a cheque/direct credit 2 or 4 times a year
- They are often partially tax deferred – which means you don’t pay tax on some of the income NOW, however if you do ever sell you pay (often 50% discounted) CGT in the future
- IP investors should be comfortable investing in commercial property – it’s just different class of tenant!
- The shares are liquid – you can sell them all by lunchtime & receive the cash 3 days later - try that with Res or Comm IP!
- They can be borrowed against using margin lending (usually a max of 65-70% LVR) – you don’t lose leverage
- Banks recognise the income for serviceability purposes -
- They reduce the volatility of a diversified portfolio – you can keep some of your IPs
- You can buy any amount of shares from $1 up
- Entry & Exit costs or v. low usually less than 0.2%. Compare this with 3% stamp duty plus 3% agents fees plus legal costs, plus….
- There are no holding costs – no land tax, property management fees
- Low maintenance – no blocked toilets to fix on Sundays
- Large asset base of several buildings usually worth > $1B
- Diversification – sector, state, or global
- They only grow at roughly the same rate as inflation, not at above the rate of inflation as share or IPs asset may do. The upside of this is most people want consistent income each & every year that grows with inflation, so LPTs fulfil this need perfectly.
- You aren’t in complete control – but if you’re retired that’s a good thing
- Their price is based on their yield. As a v. rough guide they yield around 1.5% above the ‘risk free’ rate, this means that when interest rates go up, their 1.5% yield premium is maintained so their price goes down. And vice versa.
- Some LPTs are diversifying into property development thereby increasing their risk profile.
- Some LPTs are diversifying overseas with higher associated risks – exchange rates, low local knowledge
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