Property Historical Returns 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% property Australian direct 11.2% 2.0% property 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 commercial purposes 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 successful sales Sectors of the Property Market Residential Property Commercial property Industrial Property Hotels & resorts Rural Property Residential Property Advantages: 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 Disadvantages: Poor quality of tenants R&M 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 shopping centres 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 funds Rural Property 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 buildings Residential Med- Low Med-low Low (flats, units, (3-6% net) houses) Farms Land is seldom Med-low, depending Very low separated from on markets or seasons the business) 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 services Charges vary but may comprise of 5% on the first $18000 of the sale price + 2.5% thereafter Matching investors to products Property appeals to investor because: Tangebility Familiarity 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 capital gains Suits investors who can tolerate moderate risk Suits investors looking for medium rates of return Suits investors who have a medium-to long-term investment horizon Investment Options Direct Property Ownership Listed Property Trusts Investment Options Investment Options used to invest in property include: Listed Property Trusts; Unlisted Property Trusts; Property Syndicates; Diversified Property Securities Fund; and Direct Property Ownership Property trusts 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 guaranteed. 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 assets 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 increases. 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 holders. 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 characteristics: 7-10 year investment distributions monthly or quarterly high yield of approximately 9.0% per annum Property syndicates 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 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 seven years 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 to investors. 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. Performance 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 5.5 percent. 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 securities funds. 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. Potential return Capital growth 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 horizon. Potential return 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 company’s stock. 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 cent. Remember, yields fall as house prices rise (if rent doesn’t rise commensurably). Negative gearing 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 and repairs). 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.
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