Damen Purcell, Head of Retail Distribution at Australian Unity Investments, answers this question. For investors looking to diversify their property portfolio–or seeking the potential to receive a solid and reliable income with the potential for capital growth, the Healthcare Property Trust (HPT) has been a popular choice. HPT was a staple for many advisers recommending property allocation within investor portfolios.
The popularity of the Trust combined with a lack of quality new property acquisition opportunities led to the decision to temporarily suspend applications in order to protect the interests of existing investors.
While this decision has been received positively by advisers and investors, many advisers have asked for alternative property allocations that meet a similar criterion in terms of potentially delivering stable income and moderate capital growth.
The case for Australian unlisted property
The stock market’s tumultuous start to 2016 has, for many, firmed up the case for considering alternative investment sources, particularly those looking for regular income. What sets commercial property funds apart from other types of investment is that, through periods of economic change, it can potentially deliver:
- Unlike share markets, where sentiment can be a large contributor to returns and values change daily, commercial properties are independently valued on at least an annual basis using a rational process that considers property and economic fundamentals. For this reason, direct commercial property values are typically more stable than their listed counterparts.
- Income distributions are principally made from the ongoing rental payments of tenants. By owning buildings that are leased to well known, successful companies, investors are able to indirectly access the growth of such companies. By way of example, as at 31 March 2016 nearly 70 percent of Australian Unity’s Diversified Property Fund’s rental income comes from listed or credit-rated tenants. Major tenants include Coca Cola, the Environmental Protection Agency, Myer, Woolworths, ANZ and Metcash.
- Commercial property rental agreements typically contain provisions for rental increases in line with inflation or increases by a set percentage each year. This goes some way to helping ensure investors’ income distributions grow in line with the broader economy.
How the commercial property marketing is performing
In early 2016, most Australian commercial property markets continued the strong performance they experienced in 2015. Strong investment in commercial property has continued with 2015 sales amounting to approximately $29 billion nationally for office, industrial and retail property, up 20% on the past two years. Sydney and Melbourne’s markets ranked two and three (behind Tokyo) as destinations for overseas property investors. This strong investment demand has continued into 2015 and it drove broad-based capitalisation rate compression, as well as, in many cases, increasing asset prices. For investors this typically results in steady distributions and positive capital growth.
Despite the strong investment demand, many Australian businesses continue a conservative approach to new leasing. But there are emerging pockets of strength and optimism. In Sydney and Melbourne office markets, for example, we observed rising rents and increased capital values during the last quarter of 2015. However office markets traditionally associated with the mining boom, such as Perth and Brisbane, experienced negative rental growth and declining capital values.
The Australian retail property market was also mixed. While the transactional market in retail assets continued to be strong, tenant activity remained subdued. Notable here is that in early 2016, Australian retail sales figures delivered shallow growth.
The industrial property market has continued to see yields tighten as a result of ongoing investment demand. However, across the sector we have observed increased incentives and the emergence of new supply, which has meant effective rents remained stagnant or declined.
Looking for property exposure?
Australian Unity’s Property Income Fund and Diversified Property Fund both invest with the objective of delivering a stable income and moderate capital growth. These funds are managed by the same experienced Australian Unity Real Estate Investment team as the popular Healthcare Property Trust, and have strong track records in delivering income and capital growth.
Property Income Fund
The Property Income Fund is a ‘hybrid’ fund, which invests across a range of property asset types, including direct property, units in unlisted property trusts, and listed Australian REITs. This Fund provides the opportunity to participate in the A-REIT market but offers the stability of income that comes from holding direct property. It also has the advantage of offering daily liquidity and is available for investment on most platforms.
Diversified Property Fund
With a forecast distribution range of 7.8% - 8.3%, the Diversified Property Fund invests direct property and property securities, covering a broad range of property sectors including office, retail and industrial. The diversified tenant base including many of Australia’s most recognised companies.
To provide investors with stability of income in a changing economic environment, the Diversified Property Fund aims to deliver:
- Genuine commercial property diversification
- Consistent income payments
- Big name brands and quality tenants
- Potential for capital growth
- Potential for tax deferred income
- Lower volatility
- Natural inflationary hedge
- Management from an award winning property management team.
1. The distribution return range forecast is for the full year to 31 March 2017 and is made on the basis of a number of assumptions and estimates. It is based on the ex-distribution unit price as at 31 March 2016. The forecast distribution return range is not guaranteed and is provided only to indicate current distribution projections for the Fund. We emphasise that investment decisions should not be based on forecast returns, past performance, distribution rate, or the ratings given by a ratings agency for the Fund, since these can vary, and are current only to the date of this publication. For more information on the basis for the forecast distribution return range, refer to the “Forecast assumptions” online at www.australianunityinvestments.com.au/dpf.
Australian Unity Funds Management Limited ABN 60 071 497 115, AFSL 234454 is the responsible entity for the Healthcare Property Trust. Australian Unity Property Limited ABN 58 079 538 499, AFSL 234455 is the responsible entity for the Diversified Property Fund, and the Property Income Fund, and the trustee of the Retirement Village Property Fund.
The information in this article is general information only and does not take into account the objectives, financial situation or needs of any particular investor. In deciding whether to acquire, hold or dispose of the financial product you should obtain a copy of the current Product Disclosure Statement (PDS) and consider whether the financial product is appropriate for you. A copy of the PDS is available at australianunityinvestments.com.au or by calling our Investor Services team on 13 29 39. The information provided in this article is current at the time of publication.
Australian Unity Funds Management Limited ABN 60 071 497 115, AFSL 234454 and Australian Unity Property Limited ABN 58 079 538 499, AFSL 234455 (together, ‘AUI’) grant to professional financial advisers who have received this article from AUI a non-exclusive, limited licence to reproduce content from the article, strictly on the following conditions: The reproduction must only be for use in the financial adviser's practice newsletters and similar publications. The content must not be altered in the reproduction, in any manner which may change or has the potential to change its original meaning or message, or in any manner which may, in AUI's opinion, reflect unfavourably on, or misrepresent, AUI. AUI must be acknowledged in the reproduction by using the following notice: ‘This article originally appeared in Australian Unity Investments’ Insights newsletter dated Winter 2016. Reproduced with permission of Australian Unity Investments. For further information, visit australianunityinvestments.com.au.’ If any of these conditions are not in AUI's opinion complied with, then AUI may terminate this licence by written notice to the financial adviser.
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