Residential alternatives

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Long-term studies have shown that over 10 years or more, the broad returns from the two major classes of equities – shares and property – have been fairly similar. But they often have different levels of liquidity and dividend paying shares offer the tax benefits of imputation credits.

Unless they have a multi-million dollar fund, it’s unlikely that direct property is automatically suitable for most SMSFs.  An investment of $350,000 to $600,000 in a single residential property will, for many funds, lead to both an over allocation of assets to property, and also material single asset exposure.

Commercial opportunity

In many cases, the more manageable property investments for SMSFs are units in a property trust or syndicate. Investments need to offer reasonable income and liquidity; luckily, there is a range of listed property investments that also give diversification as well as liquidity.

When they do start looking, investors need to put as much emphasis on the investment aspects as the property in the trust or syndicate. For a start, unlisted syndicates usually are closed-end where the money is locked up until the syndicate is wound up. This may entail investors taking a leap in the dark – that the properties are sound, that income won’t ebb away or that the syndicate is not carrying too much debt.

Unlisted trusts are usually open-ended, which means they have the flexibility of taking in new money, perhaps offering some liquidity. Investors also need to remember the lessons of the GFC and check the gearing in trusts: most of the better listed trusts have gearing levels between 20 and 40%.

Listed property trusts (now called A-REITS or real estate investment trusts) generally offer average yields of between 5.5 and 6.5%  and the established trusts have lowered their gearing levels to 30% or below. The listed trusts also provide a benchmark to measure unlisted alternatives because of the high level of research information.

The largest diversified AREITs by market capitalisation – GPT, Mirvac (ASX Code MGR) and Dexus (ASX: DXS) – in descending order of market size – yield around 5.4%, while Stockland (ASX: SGP) is on a prospective yield of 6.4%, reflecting its high residential property component. The recognised retail property trusts are Westfield Retail Trust (ASX: WRT), yielding 6.5% and selling at 15.8 times forecast 2013 earnings, and CFS Retail (ASX: CFX),which owns the iconic Chadstone centre in Melbourne. According to consensus forecasts from FNArena, it is trading on a prospective 2013 yield of 6.7% and a PE of 15.0 times.

Unlisted trusts

Investors need to be careful with unlisted property because this area has attracted a swarm of promoters, eager to sell often doubtful propositions to the booming SMSF market .You need to ensure not only that the trust syndicate’s assets are properly valued and income earning, but also that they do not rely on excessive borrowings. [Next week’s Switzer Super Report will include an in depth analysis of the commercial property market.]

Perhaps the safest method is to rely on established operators in the unlisted field, such as Charter Hall, Centuria and the Australian Unity Group. These operators have  several well-established unlisted property trusts, which invest in single commercial properties or niche sectors of the market, such as hospitals and nursing homes.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.