Spoilt for choice.

Amid the uncertainty and volatility of various investment types, non-residential property stands out for its stability and relatively high yield. It offers tax-advantaged income and the prospect of capital growth, it has low correlation to other asset classes, and it can offer low risk through diversification.

Investors are increasingly aware of the attractive capital growth of some property investments due to increased capital flows into the property market, low supply of investment-grade property, tightening yields and rental growth through lease structures.

The growth in the types of non-residential property investments available in Australia and the types of organisations that offer them means smart investors who recognise the value of property in their investment portfolio are spoilt for choice.

Though most advisors will recommend a 10% exposure to property in a personal investment portfolio, investors seeking a strong and reliable income may wish to think about increasing that percentage to 15-to-20%.

It is an exciting time for the property funds management industry and property-focused investors. Property and debt assets are gaining greater investor acceptance. Local and international industry and investor trends are changing rapidly, and managers are keen to design products that cater for the needs of increasingly well-educated investors.

However, the healthy development of the local property investment industry in recent years, including an ever-increasing number of investment options and the success of boutique or specialist investment houses, does not mean investors should be less cautious. Just as the number and types of equity investments diversified in the 1980s and early 1990s, so property investments have done over the past decade and will continue to do so.

Specialists

The rise of specialist investment houses means listed and unlisted products that are responsibly created and packaged can provide strong, low-risk returns. More investors are also realising property investment houses do not have to have $1 billion of funds under management to offer successful and competitive products.

They are increasingly realising boutique companies have their own strengths, and there are excellent choices beyond the giants of the listed property trust index, such as Westfield , Stockland and General Property Trust. They are also realising – and profiting – in the knowledge that ‘listed’ does not guarantee success and ‘unlisted’ can be as viable, if not more so.

In addition, smart investors are increasingly unwilling to take larger bets to achieve the best investment result. They recognise the need to broaden their investment universe.

Global

Investors are also becoming aware that listed property trusts are going global, following in the footsteps of equities. Investors are able to obtain and enjoy the benefits of international investment exposure through the convenience of locally managed listed property trusts.

An increasing number of Australian, US and European companies are investigating property investment options in key markets in Asia, where they are setting up Real Estate Investment Trusts that offer diversified products for investors with varying levels of risk, capital gain and yield.

Many listed trusts also have an increased risk profile, including currency risk, international investment risk, development exposure and business risk exposure. They may also offer decreasing income returns, have greater price volatility, are influenced by the general equity markets, and the market is driven by institutional investors focused on total return and growth. However, there are still good opportunities for small investors who do their homework and are prepared to overlook price movements and focus on strong yields, so long as the trust’s fundamentals are strong.

In comparison, unlisted property trusts offer a relatively high-income yield, have only short-term price volatility due to the appraisal valuation methodology used, have a low correlation to other asset classes, and have low liquidity.

These trusts also have a higher tax-advantaged percentage, greater product innovation and focus on retail investors and financial planners instead of institutions.

Diversification

Unlisted property trusts also offer greater diversification. There are two distinct types: portfolio composition and product structure.

Portfolio composition types include direct property funds, such as sector specific and diversified funds, or hybrid funds, which include direct property and listed property trusts.

Despite being around since the 1980s, hybrid funds have only really gained acceptance by the industry and investors in the last two years, due in no small part to the entrance of Multiplex, Centro, MacarthurCook and the APN Group into the market.

Hybrid funds can offer the best of all worlds, with greater diversification, low risk and high return, their correlation benefits, great degree of liquidity, lower fees, open-endedness, and platform-friendliness.

Product structure funds cover open-ended funds that feature defined sale dates for properties and indefinite terms, and closed-ended funds or syndicates that feature defined capital raising periods and sale of properties.

The former are more popular than the latter, because they have larger investment portfolios with a diversification of properties providing a less risky income stream for investors and can acquire additional properties further diversifying the portfolio, enhancing returns and providing liquidity.

However, the market does have its shortcomings. For example, increased merger and acquisition activity over the past couple of years has resulted in fewer players and seen the market become more institutional in nature and dominance.

Boutiques

Boutiques have succeeded because they have been able to fill a gap in the property and mortgage investment market by providing products across the risk and return spectrums. These cater for the differing investment needs of individual retail and wholesale investors.

Specialist managers, with their desire to be flexible and innovative and provide specialist property funds and more investor-focused products, have been the prime movers behind the rise of alternative property investments.

By thinking outside the traditional areas of retail, office and industrial, and recognising the lack of available opportunities, these managers have enabled investors to embrace different property types such as retirement villages, medical centres, childcare centres, petrol stations and self-storage facilities as viable investment alternatives.

Specialist or boutique investment companies can also get economies of scale with these alternative investments, so small funds – of $50 million to $100 million – that includes these types of investments can still be attractive.

Another development that has challenged the industry is the expansion of debt funds from their traditionally conservative retail mortgage base into mezzanine funds.

With this expansion has come an increased risk profile, as well as tough competition for loans, an excess of capital compared to available loans, reduced margins, funds lending on specialised securities, the rise of construction and bridging loans, and the softening of credit criteria.

The main issues for the debt fund industry includes a challenge to maintain credit quality, that industry and consumers do not sufficiently understand the different risk profiles of different funds, and a need for different product category or classification to differentiate different investment strategies and risk.

Despite developments and forecasts, the two golden rules of investment continue to apply for investors: Consider all risk factors and other information concerning investments in light of your own investment objectives and circumstances; and no two funds are the same.

Written by:

Craig Dunstan is the Managing Director and chief investment officer of MacarthurCook Limited (MCK), an Australian Stock Exchange listed company specialising in the investment management of direct property, property securities and mortgage assets. For more information visit www.macarthurcook.com.au

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