Unlisted commercial property trusts

[Unit]

I am looking at moving out of residential property investments into commercial property investments aiming to establish a passive income stream. I would be investing up to about a million unleveraged over the next 5 to 7 year.

I feel that I wouldn't get the diversity and quality for direct investment with only a million. For this reason I am looking at unlisted property trusts. I've identified a few trusts that have good occupancy, are leased to quality tenants and yield around 8 %.

Do people see this approach as a valid alternative to direct investment. What do people see as the pros and cons. Has anyone taken a similar approach and wish to share their experiences.

Thanks

 

[Edge7]

Hi Unit,

To answer your questions:

It is a valid alternative.

It is wonderful that you are able to invest unleveraged. While you may be unleveraged with your investment, make sure you check the degree of leverage used by the unlisted property trust. My understanding is that some of them are highly leveraged.

The other consideration, again from my understanding, is that UPT's only value their assets every couple of years on average so it is difficult to keep an accurate track on the value of the assets.

 

[Edge7]

I should add that I have never invested in a UPT so take my comments with a grain of salt.

 

[Unit]

Thanks for your reply Edge7. You are right about the trusts themselves being leveraged. The ones I have been looking at have about 40-50% leverage. Iwould prefer no leverage at all but haven't found anything that meets that criterior.

 

[Aaron_C]

Thanks for your reply Edge7. You are right about the trusts themselves being leveraged. The ones I have been looking at have about 40-50% leverage. Iwould prefer no leverage at all but haven't found anything that meets that criterior.

Commercial Property without leverage is like having pasta with no sauce. It ain't gonna happen.

 

[HiEquity]

Never invested in a trust but considered it. Had a similar amount to invest as well. Management costs seemed to take a fair proportion of the value and lack of control was a big disadvantage for us. The bigger deals that can be purchased by collating funds in this way can be very attractive on their own but that extra layer of costs tends to dilute a lot of that attraction. And getting everyone to agree on major changes can be like pulling teeth.

In the end we went direct with leverage and found a property with a bit of diversity (not a lot of course) and with an attractive yield. Land value could have been better but you can't have everything.

We may have the ability to do this again if a reval goes our way. This is where going direct gives you the ability to keep growing through continued leverage when values go your way through rent reviews or dropping cap rates. Getting that leverage increase on a UPT investment can be more difficult as you have less control.

 

[Rolf Latham]

scary I would have thought given "recent" Centro et al events ?

ta

rolf

 

[Intrinsic_Value]

scary I would have thought given "recent" Centro et al events ?

ta

rolf

very wise comment here by Rolf.

Even worse because its unlisted how does one exit?
Yeah sure when times are good, its easy, but in difficult times???
unlisted means no ready marketable market.

Give me listed any day in this sector. Sure you can be diluted to hell and back, sure you can be played by the insiders, sure when the going gets tough enough, the company can suspend the listed share.

But at least i have options, i can move with the times. Not so with unlisted.
As far as i see it you have all the negatives of listed, with just one small positive of unlisted: potentially higher yields given that its not consantly in the listed spot light.

 

[Macca]

Unlisted "anythings" are very easy to get into and very hard to get out of.

The trust is usually put together for the benefit of those doing it, not the investors and can be extremely hard to get control of if the managers fail to do their job properly or go belly up.

I would much rather take a reduced return and retain control of my own funds, have a read of Dazzas problems with some commercial real estate holdings. They are not all easy and often need someone with a vested interest to keep them functioning well.

 

[Scott No Mates]

Unlisted trusts, like syndicates, have the difficulties of exit strategy. Attractive returns must be weighed up against how they are achieved. what is the lease expiry profile? How will the loss of a major tenant impact on stability of returns.

As all trusts & syndicates rely on gearing to create returns you will find it next to impossible to find one meeting your criteria unless you invest in direct property.

The upside is less direct property risk, removal from management issues... Disadvantages include loss of all tax advantages and direct investment will expose you to direct risk & property management issues, vacancies impacting on returns etc.

 

[Aaron_C]

The main attraction of listed/unlisted funds is that you can pool your money together with other investors to have better buying power. In the commercial space, generally you get better returns for the more money you spend because there is less competition from buyers which pushes capitalisation rates higher. You have to weigh up the pros/cons as everyone has said - returns vs control.

 

[Rolf Latham]

The main attraction of listed/unlisted funds is that you can pool your money together with other investors to have better buying power. In the commercial space, generally you get better returns for the more money you spend because there is less competition from buyers which pushes capitalisation rates higher. You have to weigh up the pros/cons as everyone has said - returns vs control.

many accounts and some brokers, have large client bases with similar needs in this investing area, and can often put together 2 or 3 like-minded individuals to form a small syndicate to get into that 5 to 10 mill "no man's land" where ma and pa investors simply don't have the resources , and institutional investors have no interest due to the small size.

thanks

Rolf

 

[Bird Dog]

Commercial Property without leverage is like having pasta with no sauce. It ain't gonna happen.

It does happen but usually in private syndicates behind closed doors.
The negative of course is these syndicates, by their very nature have the ability to purchase higher risk type properties that offer ridiculous returns that traditional lenders won't touch.
This therefore negates the original point of zero leverage by the increased risk of the property profile.

I also lost quite a bit on Centro which I will admit was one of the main catalyst for retaking control of my finances and investing into direct CIP.

For a fraction under a $1mil, we were able to secure a CIP returning over 9% with the bonus of decent CG upside.
@ 9% it's certainly not going to light the world on fire but it was balanced out by the safety of other factors.

Cheers
B.D

 

[Unit]

Thanks for all the replies. It's not something I will be jumping into overnight so I'll keep researching and thinking about it.