Listed and unlisted property investments

With all the talk about rising property prices and interest rates projected to stay low for quite some time yet, your mind may have turned to buying an investment property. And if this is something you’re considering, it’s highly likely you’re considering purchasing another property in your hometown or possibly, the nearest capital city.

Many people who consider property investment sway towards the residential sector, which at the growth rates we’re seeing today, is no bad thing. However, as with all investments, residential property won’t continue to increase at such a dramatic rate indefinitely. At some point, it will either crash, slow down considerably or possibly even both. With that in mind, there are other viable property investment options to consider.

Alternatives include commercial, retail, industrial and the healthcare property sector. You can invest directly – by buying a house, shop, or industrial unit, where you’ll enjoy property returns in the form of capital growth and rental income minus expenses. Or you can invest through a listed asset such as Scentre Group.

Scentre Group is one example (but not a recommendation) because you’ll be familiar with its assets. They’re the shopping centre company that own the Westfield shopping centres, among others. They’re a listed asset because they trade on the Australian stock market. You can buy shares in Scentre Group on the financial markets, which will move up and down in value every day. And you can sell the shares whenever you choose.

The benefit of investing in property in the form of shares means that at certain times, you can take advantage of higher-yielding investment opportunities at far lower price points than you could ever buy in your own right. This is because although property isn’t valued every day, shares are. When the share market has a down period and everything is sold off, the share price will reduce, even though the asset and income remain the same. Therefore, if you decide to invest in shares that own property, you always need to be prepared to ride the volatility of the stock market.

Alternatively, you can put your money in unlisted property by investing directly into a fund. An example of this is Clearwater’s investment in the Barwon Healthcare Property Fund (BHPF).

The difference between listed and unlisted property assets is that the former, such as our Scentre Group example, are valued every day on the financial markets. However, it’s fair to say that this method of asset valuation is a little artificial because, in real life, property prices don’t change on a daily basis.

In contrast, unlisted or direct property investments aren’t valued every day. This is a clear benefit of Clearwater and industry super funds. That’s because when markets go into freefall, as they did at the start of the COVID-19 pandemic, most investments will take a huge hit.

However, unlisted or direct assets won’t reflect the same kind of drop. They will be revalued, but by the time that happens – which could be quarterly, annually or an even longer period of time - the market may well have recovered. This has the added benefit of smoothing over returns.

A recent example of this took place during 2020, when the performance of Clearwater’s investment in the Barwon Healthcare Property Fund was only minimally affected by the stock market crash and quickly recovered.

As a long-term investor, both listed and direct property investments offer substantial benefits. Income potential is strong and sustainable over time, with yields outperforming many other asset classes.

However, as with all investments that have attractive features, those same features can have a negative aspect. The downside of unlisted property trusts is that the capital is locked in for an extended period. This is because of liquidity. ASX listed shares are liquid because they can be sold daily. Unlisted and real property (such as residential property) are illiquid.

Unlisted trusts usually have a liquidity window that ranges from a couple of years to maybe even five years. That’s because property trusts don’t want to be forced to sell an asset simply because an investor wants their money back. It also makes sense because property is meant to be a long-term investment.

When it comes to investing in the financial markets, making sure your investments are diversified will help to reduce volatility. And introducing property into the mix is something worth considering. However, if you need assistance working out what’s right for you, have a chat with your financial advisor – they’ll be able to help.