Comparatively high rate of return
Market risk equivalent to Bonds for listed property
Market risk equivalent less than Bonds for direct property
Average ROR Standard Deviation
Australian Shares 13.2% 11.5%
Australian listed 13.3% 4.2%
Australian direct 11.2% 2.0%
Australian Bonds 7.4% 4.3%
Cash (money market) 5.5% 0.6%
Participants in property market
Investors as owners
Tenants who live in or use premises for
Valuers, Brokers & Agents who facilitate the
smooth operations of the markets
Financial institutions who arrange finance
Solicitors & Conveyors who do the conveyancing
thus managing the transfer of titles after
Sectors of the Property Market
Hotels & resorts
Ease of purchases transaction
Spread in sizes of investments
Ease with which loans may be arranged to gear investments
Usually relatively short time to contract with a tenant and start to
derive rental income
Poor quality of tenants
Turnover of tenants is usually accompanied by vacancy &
therefore no rental income
Too high a concentration of property in a small portfolio
Commercial & Industrial Property
May include stand-alone premises, premises in
strip shopping centres or large commercial
Stand- alone and strip shopping premises are
often owned by individuals and corporations,
whereas large shopping centres are more often
held by insurance companies and many investors
through both property trusts and superannuation
Most farms are run by the owners as
business and generally returns approx 1%
on invested capital therefore not particularly
attractive investment proposition
Probable Property Returns
Type Rental Returns Price volatility Liquidity
Small Med- High Med-low, depending Very low
commercial (3-10% net) on position
Residential Med- Low Med-low Low
(flats, units, (3-6% net)
Farms Land is seldom Med-low, depending Very low
separated from on markets or seasons
Taxation of Property
Rental Income from property is assessable
income for tax purposes
Legitimate expenses such as borrowing
expenses, interest, rates, depreciation, agent
commissions are all deductible expenses
Gains from the sale of property are subject to the
Capital Gains Tax Regime, with the exception of
the primary place of residence
50% discount applies to gain where property held
for more than 12 months
Accessing Property Markets
Most investors use the services of Real
Estate Agents of Brokers
Real estate agents usually charge for their
Charges vary but may comprise of 5% on
the first $18000 of the sale price + 2.5%
Matching investors to products
Property appeals to investor because:
Property values generally keep pace with inflation.
Therefore unless investors are forced to sell during a
downturn in the property cycle, they are likely to retain the
purchasing power of their funds and can make large
Suits investors who can tolerate moderate risk
Suits investors looking for medium rates of return
Suits investors who have a medium-to long-term
Direct Property Ownership
Listed Property Trusts
Investment Options used to invest in property
Listed Property Trusts;
Unlisted Property Trusts;
Diversified Property Securities Fund; and
Direct Property Ownership
Property trusts aim to generate rental income from a portfolio of
professionally selected properties with good tenants on long leases,
along with some capital growth in the value of those properties.
Property trusts can specialise in particular sectors – such as retail
or industrial property – or they can be ‘diversified’, investing in
various types of property.
They can be listed or unlisted. The advantage of investing in a trust
listed on the stock exchange is that you should be able to sell part
or all of your holding quickly – something that’s not so easy with
your own bricks and mortar. But, like any investment, nothing is
Listed Property Trusts
Listed property trusts suit investors who are looking for consistent income and the
potential for long-term capital growth from a liquid property investment
LPT managers invest in a portfolio of investment grade commercial real estate to
generate high yielding returns for investors, and buy and sell properties in line with
their investment strategy.
LPTs are viewed as a substitute for direct property investing, with enhanced
liquidity. They are the only property funds publicly traded on the ASX, with the first
trusts listing in the early 1970s
Australia’s model for LPTs is a recognised world leader. From less than $5 billion in
the early 1990s, the sector reached a market capitalisation of $43.8 billion in August
2002, invested in property assets of $62.6 billion
The LPT Index is the sixth largest sector on the ASX, accounting for 7.2 percent of
the S&P 300 Index. Real estate (LPTs and Developers) is the third largest sector.
Listed Property Trusts
The largest LPT managers are Westfield, Lend Lease, AMP
Henderson Global Investors, Macquarie Bank and ING.
A leading Australian stockbroker, UBS Warburg, estimates
that 50 percent of Australia’s investment-grade real estate is
in the hands of LPTs.
The quality of these assets is high, with 65 percent of the
nation’s regional shopping centres and many of the prime
commercial office buildings held in LPTs.
LPTs are represented by retail with $22 billion in assets,
followed by commercial office with $11 billion in assets,
industrial with $3 billion in assets and hotels with $1 billion in
How to invest in LPTs
You can buy into LPTs from as little as $1000.
In addition, some LPTs may allow you to reinvest distributions via a
Dividend Reinvestment Plan (DRP).
LPTs can only be bought and sold through a stockbroker once they are
listed on the ASX.
If it is a new listing of a property trust, you will need to obtain a prospectus
from the fund manager.
When you buy and sell LPTs you will pay fees to the stockbroker and
stamp duty at the rate set in each state for financial transactions. These
transaction costs are lower than similar costs incurred by individual
investors in direct property.
Annual management fees are payable to the LPT fund manager, where
there is an external manager, and can be expressed as a percentage of
assets under management.
On average, annual fees are likely to be in the range of 0.3 percent to one
percent of assets under management.
Risks and Returns of LPTs
Report prepared by ASX in Sept 2006
showed LPT returns for the previous 12
months ranged from -15.5% to +87.4%
Unlisted Property Trusts
Unlisted property trusts provide secure long term income streams to an
investment portfolio with the potential for capital gains through price
Funds are pooled with other investors to purchase large direct properties, a
manager then collects the rent and disperses it to the investors, or unit
Unlisted trusts are only opened for a short period, similar to a share market
float. They seek to raise a specific amount of money and once this is raised
the offer closes.
The features of the trust will vary, however most have these common
7-10 year investment
distributions monthly or quarterly
high yield of approximately 9.0% per annum
Property syndicates provide retail investors with an opportunity to invest in direct property.
Property syndicates are unlisted fixed-term property trusts that aim to provide the risk and return
characteristics of direct property investments.
The syndicates aim to provide investors with investment opportunities that will provide a mix of
income and capital returns from professionally managed large-scale property assets
Property syndicates raise funds from investors to purchase a specific property - although in
some syndicates more than one property may be offered.
The syndicate manager may underwrite the syndicate offer or make the initial property purchase
to ensure that there will be sufficient funds raised from investors to meet the purchase cost.
Typical properties are in the $20 - $30 million range.
The majority of property syndicates, 54 percent, invest in the retail property sector. More recently,
property syndicates have offered office and industrial properties – commercial office syndicates
account for 30 percent, with the remainder largely in industrial properties.
Property syndicates are structured to provide an annual income for
investors, the yield, with the property sold and the capital returned to
investors at the end of the syndicate’s life. This is usually a period of five to
Syndicates will look to manage the property to maintain its value and may
invest in the expectation of capital growth.
Typically distributions are paid to investors on a quarterly or half yearly
basis. There is a trend towards quarterly distributions in new offerings.
The current generation of property syndicates generally allows some
flexibility to the syndicate manager as to when the property will be sold by
including options for an early or limited late wind-up in the prospectus given
The direct property syndicate sector is significantly advanced in the
establishment of the world’s first property exchange. This will allow
investors to trade their holdings in a formal secondary market, which has
not been previously available.
of Property Syndicates
The performance of property syndicates – yield and growth –
varies from syndicate to syndicate and by property sector.
Management quality is considered critical to performance.
By way of comparison, the average first year yields on
property syndicates in the year to December 2001 of over
nine percent compare favourably with 10 year bond yields of
Investors in property syndicates are investing for the medium
term, not unlike residential property investing.
How to invest in property syndicates
Each property syndicate is offered publicly to investors to subscribe to by
prospectus, and is then closed to new investors.
The minimum investment is set by the property syndicate manager, but typically will
be $5000 or $10,000 on average.
Property syndicates commonly charge establishment fees, annual fees and an exit
fee, typically subject to meeting a performance benchmark. Establishment fees can
range between four and five percent of the purchase price of the property.
The annual fees may be expressed as an MER, typically in the range of 0.6 to one
percent. Or annual fees may be expressed as a percentage of the property value
and income – ranging between 0.2 and 0.5 percent of the value of the property, plus
two to four percent of the property income.
Exit fees may depend on the syndicate performance. They can be between two and
four percent of the final value of the property, depending on the extent of the growth
in the capital value of the property.
Managers of property syndicates may allow you to exchange your investments if this
becomes necessary. There is no obligation on the manager to buy back; hence
investors should expect to remain in the syndicate for the full term.
Property securities funds
The growing popularity of LPTs,has led to the development of
managed funds that specialise in investing in LPTs (as other
funds do in shares or bonds). These are known as property
Some of these funds also allocate a proportion of their money
to unlisted property trusts as well as LPTs.
The theory is that property securities funds diversify your
investments and reduce your risk even further.
Another variation on the theme is the geared property
securities fund, where managers use borrowed funds as well
as investors’ money to buy properties, with the aim of
boosting returns to investors.
Direct Property Ownership
Direct Property ownership has many attractions.
Property can be less volatile than shares – though not always
– and it tends to be regarded as a safe haven when other
assets are declining in value.
It has the potential to generate capital growth (an increase in
the value of your asset) as well as rental income.
There are tax advantages associated with negative gearing
However, as with any investment, there are no guarantees.
Property prices go down, as well as up, and sometimes
tenants are hard to find – especially good ones who pay on
time and take care of your investment.
Capital growth is the increase in the value of directly owned
property over time and is one of the main reasons people
invest in residential real estate.
Historically, Australian residential property has experienced
strong capital growth – the long-term average annual growth
rate for property is about 9 per cent – but periods of
stagnation and even decline are also part of the picture.
The nature of the property cycle means real estate should
probably be thought of as an investment with a 10-year
Rental Income & Yield
An important measure is a property’s yield. That can be calculated by
dividing the annual rent it generates by the price you paid for the property
and multiplying that by 100 to get a percentage figure.
Let’s say you bought a unit for $400,000 and rented it out for $350 a week
(or $18,200 a year). That’s a yield of 4.5 per cent. That might compare with
a dividend yield of, say, 7 per cent had you invested in a particular
But let’s say you bought a worker’s cottage in a mining town where prices
are low but the rental income as good as in the big city. Pay $350,000 and
rent the property out for $600 a week and you’ll achieve a yield of 9 per
Remember, yields fall as house prices rise (if rent doesn’t rise
Gearing basically means borrowing to invest.
Negative gearing is when the costs of investing are higher
than the return you achieve. With an investment property,
that’s when the annual net rental income is less than the loan
interest plus the deductible expenses associated with
maintaining the property (such as property management fees
When you’re negatively geared you can deduct the costs of
owning your investment property from your overall income –
reducing your tax bill.
High-income earners benefit the most, because they’re in the
top tax bracket.