Recently, our business has been approached by a larger than usual number of unlisted property trusts promoting their funds to our investors.
Given that property trusts, both listed and unlisted, generally pay income at higher levels than cash and term deposits, many of your SMSF clients may be attracted to their relatively high distribution.
With this in mind, we have provided a checklist of questions to address with your clients before they invest in any property trust.
Here is a simple set of questions that need to be considered before any investment in a property trust.
- How many properties are owned by the trust and where are they geographically located? We prefer trusts that offer diversity in properties and their location. A property trust that is exposed to one state is somewhat exposed to the fortunes of that state’s economy.
- What is the weighted average lease expiry (WALE)? This is to determine when the current leases expire. One of the key risks of property ownership is the ability to rent it out to receive income. WALE provides an insight into the average length of time left to run on the leases.
- Gearing levels – the single biggest source of destruction to property trust equity holders in the GFC was related to gearing levels. There is no escaping the fact that higher gearing equals higher risk. We prefer gearing in the 20-40 per cent range.
- Are income distributions being paid out of operating cash flow or is the trust artificially elevating distributions? This information can be sourced from the cash flow statement of the trust.
- How does the price you are paying for units/securities compare to the net asset backing of the property trust. Many trusts are currently priced at a premium to their asset backing.
- Who is the property manager? We look for property trusts operated by experienced property management teams.
- Who are the properties leased to? What is the concentration of tenants within the trust? Some poorly structured trusts have very few tenants, which increases the risk should that tenant suffer financial hardship and become unable to pay their rent.
- Is the property trust unlisted or listed on the ASX? Listed property trusts provide a simple exit mechanism while unlisted property trusts are far more difficult to sell if investors wish to exit.
Clearly this is not an exhaustive list of questions when thinking about property trusts, but we believe it is a useful starting point to narrow down the opportunity set within the property sector.
Mark Draper, financial adviser, GEM Capital