People often ask me why there are no listed or unlisted residential property trusts in Australia. The apparent failure to establish one has reminded us that the reasons are many and the hurdles are high. I am aware of several groups that are planning an assault on this as yet barren sector. Investors, and in particular financial advisors should be asking prospective residential trust managers a number of important questions prior to making any commitment. Once you have them cornered in a small room, I suggest the conversation should go like this:
The first question is perhaps the most obvious. “One of the reasons that property trusts are such a good thing generally is that they enable investors to share in assets that they could not afford to purchase on their own. Given that I can afford to purchase some residential property myself, why should I do it through you?”
The second question is about returns. “Residential property is usually geared to 70-80%. At that level of gearing, it is usually possible to extract some yield to pay to investors. Recent offerings have not offered any income to investors preferring to wait for some vague promise of long-term capital gains. Where is all the rental income going? Are you taking it all in management fees?”
This leads us to the third important question concerning management fees. “A recent Prospectus gave an indicative Management Expense Ratio of between 2% and 5%, depending on the funds raised. This is well above industry averages and is unacceptable to me. Can your Trust support a more acceptable MER, say 1.5%?”
The pen-ultimate question concerns the very important issue of track record. “OK, this is your first residential property trust. But show me what your track record looks like in other asset classes. If you haven’t managed other property trusts, why should I trust you with investing my money into an untried sector? Shouldn’t you start with a proven formula?”
While we are on the subject of the Manager, the fifth question will tell you something about the extent of belief in their product. “I understand that this is a new fund and that it will take time to establish itself. You cannot just go to financial planners and expect them to sign off on an untested concept. Are you going to invest in this Trust yourself, and how much will you be committing?” Be sure to look at the whites of their eyes when you ask this question.
The final question is about investment strategy. Are you going to invest in residential blocks or target certain suburbs? If you are adopting one of these strategies, can you demonstrate how you will achieve sufficient diversification? If you are taking a more scatter-gun approach, how will you manage to employ the large number of managers you will require without charging me exorbitant fees?
By now you will be dealing with either a sweaty palmed business development manager or a highly experienced professional who really knows his or her product, and has a clearly articulated business plan – and just as importantly a viable business structure. One way or the other, you will know whether to give them your money, or keep it in your pocket.
Just think. You haven’t even delivered your knockout punch about whether they are buying at the top of the cycle!
*Anton Lawrence is a director of Managed Investment Assessments
