Listed and unlisted trusts reliable income for SMSF

Self-managed super funds are often under pressure to find assets that will provide them with a steady income in retirement. Part of the solution may lie with listed and unlisted property trusts.

These pooled investments give SMSF members access to diversified portfolios of commercial property, with capital growth and much-valued rental income.

The average size of an SMSF is pushing $1 million but commercial property is pricey and committing a big amount to a single asset is risky.

Trusts require a bite-sized investment, although unlisted trusts can require an investment anywhere from $50,000 to $250,00. So how do they differ?

Listed property trusts (also known as A-REITs) are liquid - you can sell your shares quickly - but they can also be volatile.

With unlisted trusts you are committed to a fixed term. Either way, SMSFs are not embracing them on a grand scale. Perhaps too many investors remember how they were hammered by the GFC.

"About 70% of SMSF members are over the age of 50," says Philip La Greca, head of technical services at AMP's SMSF operations. "While they are concerned about growth, they are also concerned about capital preservation and income."

He says SMSFs allocate about 18% of their portfolio to cash and term deposits, 12% to fixed interest and almost half to Australian equities.

"Nearly 40% goes into the top 10 stocks, which are basically good dividend payers, so they get that cash flow. A large number of these people are in pension phase and they need assets that will generate income or cash flow."

La Greca says of the 18% allocated to property, three-quarters is in direct property. "There's a bit of use of listed and unlisted property but when you are dealing with an SMSF the issue of control comes up." SMSF specialist Max Newnham says well-selected unlisted property trusts with stable leases come with net returns between 5.5% and 8.5%.

"The value of the property should be dictated by the quality of the asset and the net rentals received. Listed property trusts have their value dictated by the sharemarket - they are really a subset of the All Ordinaries Index.

"If you look at what happened when the GFC hit, you had a situation where they were trading at a major premium to their underlying value and after the crash they were trading at an incredible discount - in some cases they didn't survive. So that's why listed property trusts tend to exhibit characteristics more [typical] of a share investment than a property."

While heavily geared unlisted trusts also burned and crashed, Newnham says survivors such as Australian Unity, Charter Hall, Cromwell and CorVal have proved their expertise. "Some unlisted trusts offer periodic opportunities to get your capital out. A property investment is typically done for five top 10 years. Property trusts are no different."

La Greca says there is nothing wrong with a trust that is illiquid as long as you know the rules. "Nobody had those rules until the GFC hit. Some groups will now say this is a five-year trust or 10-year trust. You are buying this suite of properties; you'll only get income every quarter and there'll be a redemption every 12 months. It's about managing those expectations. At the end of the day, when you don't have the knowledge, this is when you get advice."

Michael Hutton, a wealth management partner at HLB Mann Judd, Sydney, recommends listed property trusts and takes diversification further with a preference for Vanguard's low-cost Australian Property Securities Index ETF.

Over the past year it had distributions of 7.01% and growth of 12.23%, or a total return of 19.24%.

"When we give advice we are very conscious of liquidity," says Hutton. "The index gives you maximum liquidity and maximum diversification. An issue with unlisted trusts is you are buying into a single building or suite of buildings. It's a lot more concentrated than a listed property trust and certainly more concentrated than an index."

Hedge your bets

Super is a great way to save for your retirement but, with constant rule changes, it's a good plan to also build some wealth outside it, especially for younger people who will have to wait a long time to access their nest egg.

You can use the equity you have in your home as a deposit for an investment property or modestly gear into shares or managed funds. For more diversification, build a portfolio that combines all three.

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