One of the most interesting things I have observed in property funds management in recent times has been the increasing number of property trusts that offer something a little different. While in the past decade almost all property trusts have focused on delivering an attractive yield (distribution) to investors, there are an increasing number of equity raising activities for property trusts focused on delivering a strong capital growth result, with monthly or quarterly income deemed to be of secondary value.
As with all good ideas however, there is danger lurking in the shadows. This is not in the murky undergrowth of insufficient disclosure or in the poor judgment of market trends. These are very important issues, but are being well addressed by ASIC and the plethora of economic forecasts available at little cost. The danger lurking unseen, as tempting as a cool dip in the waters of Kakadu National Park on a excruciatingly hot evening, is the trust structure totally at odds with the business psychology of the manager, the trust assets and the outside world. A square peg has been driven into a round hole and there will be blood in the water.
Property trust investors (and hopefully their advisors) want to know that a fund manager is aligning its interests with their interests. They want comfort in the knowledge that a fund manager has the infrastructure in place to implement the optimal gearing, interest rate management, exit strategy and remuneration structure for each investment product. It is most important that a fund manager is seen to be customising rather than standardising. That is, every attempt should be made to avoid a “one size fits all” business model.
Why does one size not fit all products? Each property asset comes with its own characteristics. It may be a single tenant property leased to a Government tenant or major Australian bank. On the other hand, it may be leased to a number of privately owned companies. The property may be recently constructed and thus come with high levels of depreciation allowances. Or it may be a property constructed in 1965 and in need of refurbishment. In fact there are so many different combinations that it can be argued that each property or portfolio of properties is unique and thus requires a unique structure.
This example covers just the asset characteristics. What about the fund manager themselves? Is the way they are structured as a business commensurate with the product structure they are seeking to manage? The answer to this question can often be found in the psychology of the business owners or key stakeholders. They may opt for a conservative approach to their own business but may be managing highly leveraged and highly management intensive investment products.
As well as the property assets and the business psychology, it is important to ask whether the property trust structure fits with prevailing financial markets. The argument over whether to fix interest rates or not has been going on for years and is a great example of fund managers adopting a standard approach, rather than always considering the possibilities. Whether or not it is worth sacrificing 50 or 60 basis points of distributions now, on the off chance that you are unable to fix rates down the track if things get hairy, requires considerable thought as there is no umbrella solution that will best serve the interests of investors in all products.
Some believe that the one size fits all approach still applies to ASX listed trusts. I disagree, as I do not believe that liquidity is the tonic for all ills – particularly if they are a symptom of a structural anomaly. It is incumbent upon all fund managers to ensure that they have a customised solution to all structural issues. This is the only way to ensure that the danger lurking in the shadows remains only in their worst nightmares.
By Anton Lawrence, a director of Managed Investment Assessments.*
