Property Trusts – Listed or Unlisted?

Listed Property Trusts and Unlisted Property Trusts are two popular investment options for investors seeking exposure to the Australian property market.

Both investment options have their advantages and disadvantages. In our blog, we discuss their performance, liquidity, and other factors to help you make an informed investment decision.

What are the differences?

Listed Property Trusts are publicly traded on the stock exchange, making them more liquid and transparent than Unlisted Property Trusts. Investors buy and sell these in the same way we trade shares, hence giving them daily access to their funds if required. Both are managed by a fund manager or smaller group, but often there is no visible daily market. They do, however, publish regular Net Asset Values of their underlying holdings, which gives us the unit value.

Performance can be differ

Historically, Listed Property Trusts have outperformed Unlisted Property Trusts in Australia. As of 30 April 2023, the S&P/ASX 200 A-REIT index of Listed Property Trusts returned an average of 10.1% per year over the past 10 years. Compared to 8.3% per year for Unlisted Property Trusts (based on Mercer/IPD Australia Core Wholesale Property Fund Index).

However, the same listed index posted a negative 1-year return of 10.2%, versus a positive 3.8% return for the unlisted index. So why can we see such a divergence in returns for funds that essentially invest in the same underlying pool of assets?

As Listed Property Trusts are traded on the exchange, the market effectively reprices these securities daily. The market is generally considered “forward-looking”. That is, it considers current and expected future market inputs in determining the value of assets.

For example, if the market believes the RBA cash rate, and hence bond yields, will be much higher in six months’, this will be reflected in generally lower prices for Listed Property Trusts. Higher interest rates translate into higher yields or capitalisation rates, and hence lower valuations for assets. Additionally, the future cash flows that these assets should generate, are discounted at higher rates, resulting from higher interest rates.

All property trusts, both listed and unlisted generally revalue their book of assets once, perhaps twice a year. These valuations are reflective of current discount rates, yields, and property-specific inputs, such as occupancy levels. Furthermore, recent market transactions for similar property types are taken into account. We might see a six-month period where there is no real change in a trust’s valuation of its property portfolio, due to lag effect, or independent valuation may even keep the property value unchanged. However, if the listed market, for example, believes the Net Tangible Asset value in a trust should be lower due to, say, expectations of rapidly increasing interest rates over the coming six months, the market price of these listed assets could fall dramatically.

This was the experience of the Australian listed Real Estate Investment Trust (REIT) market in the past year. Many REITs are trading at levels 20% and 30% below their most recent Net Tangible Assets (NTA).

Charter Hall Long Wale REIT, for example, is trading at $3.92 (at the time blog post), versus the most recently published NTA of $5.65 per unit (30.6% discount). The unlisted Fund’s unit price, however, generally remains at the Fund NAV (or NTA). As we can see, the unlisted unit price could remain stable, whilst the listed asset price, driven by on market trading, could trade at a discount or premium to the actual NTA.

Preceding example, the investor in the Listed Property Trusts has seen a sharp fall in the value of their investment. Whilst a similar Unlisted Property Trusts investment could likely be stable, despite similar underlying assets in each trust.

Is the market overreacting in the case of the Listed Property Trusts, or are the Unlisted Property Trusts valuing its assets too high, or revaluing too slowly?

What’s important to me?

We can see how liquidity can act as both a positive and negative for the investor. The Listed Property Trusts offer the investor (generally) a liquid secondary market, making entry and exit fast and easy, compared to a large number of Unlisted Property Trusts.

However, as seen above, the illiquidity of the Unlisted Property Trust can contribute to unit price stability. For a long-term investor, liquidity may not be high on the list of requirements. In this case, the relative stability provided by the Unlisted Property Trust may compensate for the ready assess to one’s capital. The investor should asses how important liquidity is to them, and how “long term” they view this investment.

Similarly, Unlisted Property Trusts offer different degrees of liquidity. Larger, multi-asset funds may offer more regular access to redemptions. However, there are several single-asset Unlisted Property Trusts or syndicates, which often require an investor to commit, or “lock up” their capital for longer terms, often until the asset is sold (hopefully for a profit).

Summing up

There are pros and cons to investing in both Listed and Unlisted Property Trusts.

Whereas Listed Trusts offer investors easier liquidity, this can expose them to more volatile unit pricing. While an unlisted investment, whilst generally more stable, can increase an investor’s “lock up” and sometimes concentration risk.

Each investor must ascertain what is most important to them in deciding where to invest.

Written by Ashley Cox
Portfolio Manager – Fixed Income Fund
Oracle Investment Management

Important information – Oracle Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.

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