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Unlisted property yields piquing investor interest

by Jason Huljich, Joint CEO

In November 2020, the Reserve Bank of Australia lowered its cash rate by 15bp to 0.10%, which is the lowest in our country’s history and certainly contrasts the highs of 12% experienced during the 1991 recession.

Then, like 2020, our recessions were the result of macro-economic, international influences rather than domestic-induced decline. It means the domestic market metrics are still relatively resilient with opportunities outside of cash-related investments.

For investors – both onshore and offshore – the hunt for investments with income-producing yields is ramping up. While many turn their attention to the equity markets and REITs on the property front, I believe there’s a strong argument for unlisted property funds as well.

My experience throughout 24 years in real estate funds management, is that a significant proportion of unlisted funds, such as Centuria’s, are made up of retail investors. These are mum and dads looking for opportunities to increase their wealth. These investors also make up the majority of our $4.5 billion unlisted real estate funds[i].

Historically within Australia, a typical investment option for mum and dad investors may have been the buy-to-let (BTL) residential property market. Usually, one or two apartments would be bought and the mortgages covered by rental income, with an expectation of a capital gain after several years of ownership.

However, in this COVID impacted market, residential rental supply has significantly increased due to curbed international students, lower migration and those young working professionals who’ve been stood down or endured a pay cut, moving back in with their parents. Consequently, current residential property investment yields have fallen year-on-year. According to SQM Research, average capital cities’ gross rental yields (ungeared) for a two-bedroom apartment fell from 4.6% in December 2010 to 3.8% in December 2020. For ‘all house’ types, yields fell from 3.6% to 2.8% across the same period.

With the concept of property ownership not foreign to many mum and dad investors, appetite for commercial property funds is increasing as we’ve witnessed through the significant enquiry in several of our funds during the past six months. These are both unlisted fixed-term funds and unlisted open-ended funds.

Unlike residential BTL assets, commercial funds have longer lease terms with stronger tenant covenants. The tenants are also responsible for repairs and maintenance and often property management fees. Conversely, for BTL properties the owner is responsible for these costs. Below is a quick, general comparison between residential BTL investments and unlisted funds.

Residential buy to let Commercial unlisted property funds
Short term leases (6-12 months) Long term leases (3-10 years)
Lower tenant strength (individuals and families) Higher quality tenants, for example, institutions, government departments, ASX listed entities and multinational corporations.
Owners pay for repairs, maintenance, and property management fees. Tenants pay for repairs and maintenance, and often the property management fees.
Potentially benefit from a capital gain Potentially benefit from a capital gain
Various experts recommend retaining for seven to 10 years Owned on average between five and seven years

As with all property investments, it is also important to consider the specific characteristics and risks of each property, be it commercial or BTL, along with structural aspects such as the level of gearing required to produce the investment yield, liquidity and the like.

So with less volatility, fewer outgoings and higher quality tenants, it’s no surprise more investors are considering unlisted property funds as a sound, wealth generating investment.

[i] As at 22 October 2020