A property fund, also known as a property scheme, is an investment in commercial, retail or industrial property assets It’s either listed on a public market, such as the Australian Stock Exchange (ASX), or unlisted.
Property funds, or property schemes, are broad terms that refer to property trusts and real estate investment trusts (REITs).
Before you invest in a property fund, consider getting professional advice from a licensed financial adviser. It’s important to understand how they work and weigh up the risks to decide if a property fund is the right investment for you.
How property funds work
A property fund is where you buy 'units' in an investment run by a professional investment manager. They pool your money together with other investors’ money and invest it in property assets. These may include commercial, retail, or industrial assets.
The investment manager selects and buys investment properties. They are responsible for maintenance, administration, rental collection, and improvements to the properties. Some funds invest in property development, which means there are construction and development risks.
Depending on the type of fund you invest in, you might get a regular income (distributions), often paid quarterly or half-yearly. You may also get a capital gain on your investment if the value of the underlying assets increases.
Listed versus unlisted property funds
Listed property funds
Listed property funds are also called 'property trusts' or 'real estate investment trusts' (REITs). They’re listed on a public market, such as the Australian Securities Exchange (ASX).
Characteristics of listed property funds
- Transparent value – you can see what each unit is worth at any point in time.
- Traded on a public market – easier to buy and sell as they’re traded in the same way as shares.
- Subject to market listing rules – they must meet the standards set by the market they’re traded on.
Unlisted property funds
An unlisted property fund does not list on a public market and you buy into it directly.
Characteristics of unlisted property funds
- Less transparent value – you can't easily see whether the value of your investment is going up or down.
- Less supervision – they are not subject to ongoing supervision by a market supervisor, such as the ASX.
- Difficult to withdraw money early – the fund may have rules that locks in your money for a certain duration. If you can withdraw your money it may be subject to strict conditions and fees.
Check a property fund is suitable for you
An investment manager must give you a product disclosure statement (PDS). The PDS tells you how the property scheme works. Read the PDS to understand:
- the features and risks of the investment
- the fees you will pay
- who will be managing the trust
To decide if a property fund may be suitable for you, consider:
- the risks of property fund, outlined below
- when you can withdraw your money and if a deferral period applies
- how the fund calculates the unit price and whether that can change
Understand the risks of property funds
Investment managers for unlisted property funds must report on benchmarks set by ASIC and explain how the fund meets them. If the fund does not meet these, they must explain why and how this affects risk.
Listed property funds do not have to report on these benchmarks, but they can still provide a good checklist to assess the risks.
Look at the fund’s annual report, which you can find on their website, to see how they are performing against these benchmarks. Use the checklist below as a guide to help you.
Checklist to assess property fund risks
Gearing
Check: What the fund owes (its debts) versus what it owns (its assets). Look for the investment manager's policy on gearing for each loan it has.
What it means: If the property fund has too much debt to repay, it is more susceptible to stress if interest rates rise.
Interest cover
Check: Can the fund meet its interest payments from its earnings? Look for the investment manager's policy on interest cover for each loan it has.
What it means: If a property fund can’t cover interest repayments with its earnings, it may need to sell assets to pay loans.
Interest capitalisation
Check: Does the fund pay interest on its loans during or at the end of the loan period (capitalised).
What it means: If interest payments are capitalised, will the fund have enough cashflow to handle higher payments if needed.
Fund borrowing
Check: The key terms on any loan and when the fund must pay its debts.
What it means: Know the key terms of any loan and repayment deadlines to assess the fund’s financial status.
Portfolio diversification
Check: The number, value, sectors and locations of the properties the fund is investing in.
What it means: Understand how the fund manages risk across its investments.
Valuation policy
Check: How and when the property fund values its underlying assets.
What it means: Understanding the value of a fund’s assets can help assess its financial position. Valuations should be done regularly and by suitably qualified experts.
Related party transactions
Check: The number and value of loans, investments and other transactions the fund has with related parties. Look for the investment manager's policy on related party transactions.
What it means: This will help you understand how the fund manages conflicts of interest.
Distributions
Check: If the fund pays distributions from income received. If not, how it pays income payments and whether they can continue long term.
What it means: ‘Distributions’ are payments you receive from the fund each year. Know how investors are paid and the risks of receiving distributions from sources other than cash from operations.
Withdrawing from the fund
Check: Whether you can withdraw from the fund and under what conditions.
What it means: Not all property funds have withdrawal rights. Even if you can take your money out early, or at short notice, you might have to wait a while to get it back.
Net tangible assets
Check: The fund's net tangible asset (NTA) backing per unit.
What it means: The NTA value can greatly influence investor returns, and can be affected by fees, capital raising costs, and other expenses.
Find out how managed funds work and how to compare and choose a fund that's right for you.