REITs (Real Estate Investment Trust) vs Unlisted Property Funds

Looking for a set and forget commercial property investment? Two popular choices are a Real Estate Investment Trust (REIT, or A-REIT for a trust in Australia) and unlisted property trusts (also known as unlisted property funds and commercial property syndicates).

To some, a REIT and unlisted property fund might seem like pretty much the same thing.

They’re professionally managed, and a way for time-poor and inexperienced investors to invest in big league property. Both also distribute regular income and provide an opportunity for serious capital gains.

But look closer and you’ll see that a REIT and unlisted property trust differs in a range of areas:

Structure
Liquidity
Volatility
Minimum investment
Volume of investors

Here we’ll show how a REIT and unlisted property trust differ more than you think.

What is a REIT?

A REIT is an organised property investment trust. A REIT will issue securities to its investors, just like shares, and for that reason seems like a simple way to invest in real estate. But it does have many differences to unlisted property trusts which make many investors reconsider their investment.

Let’s take a look at how a REIT differs to an unlisted property trust.

5 ways an unlisted property trust and a REIT differ

1. Structure

If you invest in a REIT, you’ll be issued securities. These act like shares, because they are publicly traded on the ASX through a stockbroker and they pay a regular dividend (although not actually classed as a “dividend” but more accurately as distribution).

Meanwhile, the investment in an unlisted property trust is privately held. The trust will offer a limited number of units for purchase.

2. Liquidity

A Real Estate Investment Trust has the benefit of a highly liquid investment because of the nature of how securities are traded. Securities can be offloaded anytime in a REIT, just like shares, so you can get out at any time should you want to put your cash elsewhere, or if you think it’s a good time to exit.

Meanwhile, units in an unlisted property fund are usually secured for the entire period of the trust, making them illiquid. It can be difficult to cash out of your investment should you need to, as you can’t sell your ownership at the drop of a hat.

In saying that, there are usually ways out if you really need to liquidate your holdings (in our experience, this is a rarity). If you consider an unlisted property trust, check the syndicator’s policy or FAQs on exiting the investment. Units may can sometimes be sold to other investors.

3. Volatility

A highly liquid investment, like securities in a REIT, also means a highly volatile investment. Because securities change hands often, their value is subject to daily fluctuations (again, just like shares).

But because units in an unlisted property trust are secured for the entire period of the trust, there is far less volatility than you’ll see in a REIT investment.

(The investment itself, in direct property, is far less volatile than the ASX. For the property market to have the same volatility as the stock market, each property would need to be bought and sold every day.)

So, if you like a passive investment, where buying and holding is your strategy, you might prefer an unlisted property trust.

4. Minimum investment

Some unlisted REITs allow investment as little as $500. This opens the doors to new investors and those wanting to ‘play’ in a new investment avenue.

Unlisted property funds are typically for those with deeper pockets. Minimum investments can be anywhere from $25,000 to $250,000.

A REIT might be a good way to go if you don’t have much capital to play with. But a larger minimum investment, like in an unlisted property fund, isn’t necessarily a bad thing. You’ll invest alongside more sophisticated investors and have access to exclusive privileges.

5. Volume of investors

In a REIT, you might be treated as just a number. You’ll have no idea how many other investors are partaking in the fund (but with a minimum investment of $500, there’s likely to be many).

Unlisted property trusts have a certain number of units on offer. And with the larger price tag, you’ll be one of a smaller pool of investors with a share in the syndicate. You’re not just a number, but a member of an exclusive investment opportunity.

How can I invest in a REIT or unlisted property trust?

If you plan to dive into a set and forget commercial property investment, you’ll find benefits in either a REIT or unlisted property trust.

Despite the differences between both investment avenues, you should first dig up answers to a few questions before you invest:

Where is your money going? (Retail? Industrial? Office? All three?)
Do you have access to the Trust Deed and know your rights as an investor?
Have you done your due diligence on the management team?
Does the fund have a history of performance?
Does the trust manager have skin in the game?
Can you speak with past or current investors?
Are distributions paid regularly? (Ideally, distributions will be paid monthly.)
Have you talked to your accountant or financial planner?

All investment comes with risk. It’s your duty to ensure you choose the right one for you and your financial situation.

For more information on how to invest in an unlisted property, get in touch with Properties & Pathways today. If you’d like the best news & views on the commercial property industry, subscribe to our monthly newsletter here.