History can provide a great exposé of fault lines and misconceptions. On occasion, it can also be a little bit embarrassing. Mark Lumby, head of property funds – retail at Australian Unity, asks the question: how could 99.89 percent of the money flowing into Australian managed funds 10 years ago have missed the highest performing asset class? Even today, the question persists—why does so little money, relatively speaking, flow into direct, unlisted property funds?
When it comes to investment performance, our industry can quite literally argue the alpha off its own index.
It can be refreshing, however, to occasionally go back to basics and assess different types of investment by their long-term performance. (Of course, past performance should not be considered an indicator of future performance.)
Property’s surprising total return performance
A recent report from Atchison Consultants for the Property Funds Association highlighted the performance of different asset classes. The report compared the performance of direct property against Australian and international shares, fixed interest, listed property (A-REITs), residential property and cash. The comparison was done over the 10 and 25-year periods to 30 June 2013.
Source: PFA Investment Report (Direct property), Performance Analysis, February 2014, and Australian Unity Real Estate Investment, May 20143. Returns are calculated after costs and fees before tax. Past performance is not a reliable indicator of future performance.
Considering the fundamental differences between asset classes, it can be difficult to mount a fair comparison on all but the broadest of factors. Nonetheless, the outcome as shown in Chart 1 will likely surprise many. Taking the top spot in the 10-year comparison of absolute returns was direct property, returning 9.6 percent per annum over the 10 years to 30 June 2013.
Added to the chart is the comparative performance of unlisted property funds. Using a composite index for direct property funds over the 10 years to 30 June 2013, the average annual return for direct property funds was a very healthy 10.4 percent per annum.
An investment in direct property can be held through a number of vehicles, including listed property trusts, a closed-end syndicate, an unlisted managed fund and superannuation funds.
The annual return for unlisted property funds over the 10-year period is higher than the return for direct property, primarily as a result of the gearing in many of these funds. Gearing has the effect of magnifying both gains and losses in the underlying property assets.
Considering the performance of property over the long term, why does it attract so little managed fund inflows?
More than 99 percent missed the bullseye
While investment advice is ultimately based on many factors, it’s hard to ignore the performance imperative. So it is interesting to look back 10 years to see the flows of investment money into various asset classes.
According to Morningstar, asset flows into managed funds during the period from 1 July 2003 to 30 June 2004 were:
52.37 percent, or around $36 billion, invested in cash
21.18 percent, or around $14.6 billion, invested in Australian shares
15.40 percent, or around $10.6 billion, invested in international shares
10.95 percent, or around $7.5 billion, invested in Australian fixed interest
Property and infrastructure attracted the relatively paltry sum of just $71.7 million, or 0.11 percent. Effectively, then, 99.89 percent of the money flowing to managed funds a decade ago missed the bullseye and was unsuccessful in capturing the performance of direct property, or the even higher mark of unlisted property funds.
Interestingly, the flow of investment money over the entire 10-year period tells a similar tale: cash 61.10 percent, Australian shares 17.18 percent, international shares 14.64 percent, fixed interest 6.30 percent, and property and infrastructure 0.76 percent.
This prompts the obvious question—considering the performance of property over the long term, why does it attract so little managed fund inflows?
Why the reluctance?
As we know, investment decisions are personal and recommendations to invest in one asset class over another will revolve around many individual needs. Nonetheless, we can make some generalisations about why there has been relatively little money flowing into managed property funds.
The three issues I most often hear raised by financial advisers are the fact that many investors already present as over-invested to property through their own home or other residential property investments; the level of gearing, or borrowings, taken on by unlisted property funds or syndicates; and liquidity—an investor’s ability to redeem an investment at a point of choosing.
Like unlisted property funds, investing in residential real estate has on average delivered strong long-term investment returns over many generations. However, commercial property is fundamentally different to its residential counterpart. A good example is the difference in the types of tenants each attract. Unlike residential tenancies, which often depend on short lease terms and receiving rent from individuals, commercial property owners can agree longer leases with large multi-national companies. Larger commercial assets will also tend to have many leases in place with a diverse range of tenants over multiple timeframes.
An investment in an unlisted property fund may then present a very different opportunity for investors to diversify their investment and reduce asset concentration risk.
Investors may need to structure their investment portfolio around their liquidity needs
With regards to gearing, as we’ve seen borrowings will lead to greater gains and losses as a result of capital movements in the underlying property assets. This is precisely what happened during the 10-year period to 30 June 2013—unlisted property funds outperformed direct property. Higher borrowings also lead to greater volatility in the performance of geared property investments.
Moving to liquidity, concern about withdrawals from unlisted property funds act as a deterrent for many investors.
But considering the characteristics of the underlying properties owned by an investment in an unlisted property fund, it is hardly surprising that liquidity should need to be addressed by investors and their advisers early on. Commercial properties, by their very nature, aren’t bought and sold with the frequency of listed investments. Industrial assets, for example, can take several months to sell, and large office buildings can take up to a year to market, negotiate and settle. Hospitals, for the most part, are scarcely traded and are tightly held.
As a result, investors may need to structure their investment portfolio around their liquidity needs, and plan for a withdrawal from an investment in property over a longer and more staged time period.
Choosing the right investment?
Ultimately, liquidity is probably an issue best addressed on a case-by-case (or manager-by-manager) basis. At Australian Unity Real Estate Investment we manage around $1.6 billion at 30 April 2014 in commercial property assets across office, retail, industrial and healthcare property sectors.
While we’ve offered closed-end commercial property syndicates previously and will no doubt do so again in the future, our primary investment offerings are open-ended unlisted property funds. Examples include the Australian Unity Diversified Property Fund and the well-known Australian Unity Healthcare Property Trust.
Each of our funds have different objectives, but there are some general points about liquidity that can be made. Across the funds we aim to provide a limited measure of liquidity on either a quarterly or six-monthly basis, depending on the fund. Regular withdrawal offers allow investors who want to redeem funds to apply for withdrawal. These applications may be scaled back, depending on the total level of withdrawal requested, so investors may need to make multiple requests over a longer time period to redeem their full investment.
Understanding the liquidity on offer and the history of it can assist investors and advisers overcome the concern as part of a risk/reward decision. This is something I encourage financial advisers to discuss with their Australian Unity Business Development Manager.
Looking ahead, the team at Australian Unity is optimistic about the future performance of its unlisted property funds. Certainly, we’re in no position to guarantee they will top the next decade’s performance league table and do so with relatively low volatility. However, we do hope so many investors don’t miss out on the potential benefits that an investment in property can provide over the next ten years.
1. PFA Investment Report – Direct Property, Performance Analysis 10 Years and 25 Years to June 2013, Property Funds Association and Atchison Consultants, February 2014
2. Over the 25-year timeframe, residential property was the top performer at 9.7% p.a. This was followed by Australian shares (9.0% p.a.), fixed interest (8.7% p.a.), direct property (7.8% p.a.), A-REITs (7.7% p.a.), cash (6.9% p.a.) and international shares (5.7% p.a.). Over the same 25-year period, unlisted property returned 7.0% p.a. based on the Mercer Unlisted Property Index until 30 June 2004 and the Property Council / IPD Retail Property Fund Index from 1 July 2004 to 30 June 2013.
3. Mercer Unlisted Property Index until 30 June 2004 and the Property Council / IPD Retail Property Fund Index from 1 July 2004 to 30 June 2013
4. Morningstar Asset Flows, Australia funds including platforms, ex exchange-traded funds and excluding obsolete funds, 1 July 2003 – 30 June 2004
5. Morningstar Asset Flows, Australia funds including platforms, ex exchange-traded funds and excluding obsolete funds, 1 July 2003 – 30 June 2013
Australian Unity Funds Management Limited ABN 60 071 497 115 AFSL 234454 is the responsible entity for the Healthcare Property Trust and Australian Unity Property Limited ABN 58 079 538 499 AFSL 234455 is the responsible entity for the Diversified Property Fund.
The information in this article is general information only and does not take into account the financial objectives, situation or needs of any particular investor. Before deciding whether to acquire, hold or dispose of a product, an investor should refer to the relevant Product Disclosure Statement (PDS). A copy of the PDS can be obtained by calling 1800 649 033 or 13 29 39 or visiting www.australianunityinvestments.com.au. The information provided here was current at the time of publication only. Past performance is not a reliable indicator of future performance.
Any examples or information provided in this article are for illustrative and discussion purposes only and do not represent a recommendation or Australian Unity’s view on future events, and in no way bind Australian Unity.
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