A beginner's guide to unlisted property funds
Most people are very familiar with residential property, with house price movements often discussed around dinner tables. However, it is not the only kind of real estate and there are many other property types that investors can invest in.
Commercial property consists of direct property assets such as factories, office buildings, warehouses and shopping centres. While these all incur substantial initial capital investments, that does not necessarily rule out the retail investor from enjoying investment gains when these properties rise in value. One way they can do that is via an unlisted property fund.
What is an unlisted property fund?
An unlisted property fund is a pooled fund of a number of different commercial properties. The properties in the fund are not listed and nor is the fund itself. It can also consist of just one single commercial property.
Many unlisted property funds will invest in a particular type of commercial property - such as offices, shopping centres or healthcare centres. There are global unlisted property funds and also a number of Australian domestic funds. The fund manager offering the fund will purchase the properties and manage them on behalf of the investors.
Commercial property can respond differently to economic conditions than residential property and usually offers investors higher returns on their investment. At around two to three years, leases are also generally longer than for residential property, which provides another layer of security for investors.
How do unlisted property funds work?
There are two main kinds of unlisted property funds - closed-ended unlisted property funds and open-ended unlisted property funds.
In a closed-ended fund, the fund manager issues a set number of units for investors at the beginning, who are generally with the fund for the duration of the investment. They are making a bet on the capital gain that the investment will make. A closed-ended fund is usually a single-asset fund and will run for approximately five to seven years. It might own a single office building or a healthcare property, for example.
An open-ended fund will generally invest in more than one property and the fund manager does not issue a set number of units. They can issue more units as the fund expands and invests in more properties, for example. An open-ended fund operates with no fixed-end date and can continue investing in properties indefinitely if it wants to and has the capital.
Investor returns for any type of unlisted property fund will consist of income, for example rent paid by tenants of the property, and capital gain upon sale of the underlying property.
How do you invest in them?
Like other managed funds you can invest in unlisted property funds directly via the fund manager. If you go to the particular fund manager's website you should be able to download the fund's product disclosure statement (PDS). This will provide you with detailed information about the fund, including how it is managed, its fee structure and how frequently it pays distributions. It may also detail a minimum initial investment, often around $10,000, which you will need to invest to start with.
The PDS also includes an application form and other relevant information you will need to complete if you plan on buying units in the fund. You can send the PDS back to the fund manager via mail or complete the applications online if the fund manager has that capability.
Some investment platforms also include unlisted property funds on their menu so you may be able to access this unique asset class that way.
Get stories like this in our newsletters.