Some people look at property investment schemes and feel a bit wary. They’re not sure how to do it or how much money they will need to invest. But that doesn’t mean that they can’t invest. In fact, there are plenty of reasons why property investment schemes are so popular.
The property investment industry is booming. It’s not just in Australia, either. From various reports, it seems that there is significant appetite for property investments across the globe and a significant amount of money is being pumped into the sector.
A lot of people are now looking to invest their money into the property market in order to earn regular income and also capital growth over a longer term. Let’s take a look at some of the more common types of property investment schemes, how they work and what you might expect from them.
How to Choose the Right Property Managed Investment Scheme (“property schemes”)
Property schemes can be a good way to invest your money into the property market, whether you are a first-time investor or a seasoned property investor. However, before you invest in a property investment scheme, you need to make sure that you have chosen the right property scheme for you. There are very many different types and quality of property schemes and managers.
If you wish to buy properties (i.e., in your own name or your entity’s name) directly then you will be limited to a size that is in line with your financial capacity. Investing in property schemes will enable you to get exposure to a more varied array of type and size of property. Property schemes can invest in various categories of property including -residential, commercial, industrial, multi-use or a combination of these types. Each type of property has its own unique characteristics and risks.
Exposure to property can also be obtained by investing in property funds that invest real estate, property mortgages, shares in special purpose vehicles that own real estate and various hybrid structures.
There are a few general types of property schemes:
Retail (registered) or wholesale (unregistered or occasionally listed) broken down into:
- Listed on a stock exchange (REIT’s) or not listed on a stock exchange. They can be broadly broken down as follows.
- Passive- buy, lease and hold. These can be funds that have only one property or many properties.
- Property development schemes. These vary enormously in their structure and risk profile.
- Property development schemes may also include greenfield sites being sites that require the correct zoning so that they can be developed into housing lots, for example.
What do I get if I invest in a property investment?
In a property investment an investor normally acquires units in a unit trust. The units represent an investor’s proportional interest in the underlying assets of the trust. As the value of the trust’s net assets increase, then so should the value of the units acquired. However, this is not always the case, particularly with listed REIT’s. Their value can vary significantly depending on the vagaries of the stock exchange.
Listed property schemes
This type of property scheme is listed on the ASX and are also known as real estate investment trust (REITs). Units can be bought and sold on the stock exchange at the agreed price at the time. Investors should be aware that even some listed trusts have limited or at times no liquidity. Meaning that at times there may be no buyers offering to buy. Listed trusts also vary significantly in their size and property mix.
Unlisted or private property schemes
An unlisted property scheme is one that is not listed on a public stock exchange. In other words, these properties are privately held, with the details not being made public. These schemes can be offered to retail investors, in which case there will be a product disclosure statement issued by a responsible entity or a scheme that is limited to wholesale investors, in which case there be an information memorandum issued by a suitably licenced trustee.
These types of schemes are either for a set period of say, seven years or open ended. With set period schemes there is not necessarily any way to redeem your units. That is, they are considered to be illiquid.
Other issues to consider when considering investing in property schemes
- Gearing/Scheme Borrowing
- The loan to asset ratio is often very conservative in property funds. Gearing is often limited to around 50% of the value of the real estate held the fund. This type of lending is done with the asset as the only security. Investors are not expected to provide personal guarantees.
- Portfolio diversification
- The number, value, sectors and locations of the properties that a particular investment portfolio consists of.
- Valuation policy
- Investment managers usually get independent valuations every two or three years. In other years they may do director or curbside valuations.
Disclaimer: This information is for education purposes only. It is not general or any other type of financial advice.
If you are a property owner or developer and are interested in setting up a property fund and would like to know more about property investment schemes in the Melbourne region contact David Butterfield from Butterfield Consulting Services and he’ll be happy to work in a time that suits you to discuss your options further.
