How direct property went from dead to darling

You have to be of a certain age to remember it, but at one stage back in the 1980s there was five times as much money in unlisted property funds and syndicates as there was in the Australian Stock Exchange (ASX) listed landlords.

Cue the property price collapse of the early 1990s, and every property fund that didn’t go broke limped its way into the liquid harbour of the ASX. There were exactly three direct property capital raisings during the whole of 1993. As InvestorWeb senior analyst Rodney Sebire remembers, “advisers wouldn’t touch them with a barge pole”.

But Sebire is right when he says advisers have “softened” their attitude since. There were over 60 capital raisings for direct property vehicles in calendar 2003, both open-ended funds and closed-end syndicates, adding to a pile that by the end of last year stood at $11.5 billion for prospectus-driven property products.

That’s still a long way from the $60 billion riding on Australian listed property trusts, but with direct funds continuing to find hungry audiences into 2005, it’s been a remarkable recovery for 1997’s asset class of virtually nothing.

The year 1997 is relevant because it was the following year’s introduction of the Managed Investments Act (MIA) that kicked off the comeback for non-ASX property, according to principal of property research specialists Managed Investment Assessments, Anton Lawrence. “The MIA introduced the transparency and the checks and balances which advisers needed to regain confidence in direct property,” he says.

Two other factors have heightened the appeal of direct funds compared to their listed brethren in the years since, Lawrence says. One is the listed property trusts’ (LPT) well-known ‘loss of innocence’, looking more like plain old equities every day as they staple management, development and construction risk onto their traditional rent-collecting.

Over a medium-term horizon where interest rates are rising, for example, IWL’s Sebire points out that ASX-correlated LPTs have a lot more to worry about than direct property funds. Talking his own book, but making an oft-echoed point, Centro fund manager Bryce Mitchelson says the renaissance of direct funds “reflects a move toward an increased stability of returns and more secure asset backing”.

The other thing going for non-LPTs is that they have become a lot less intimidating to ‘mums and dads’ and their advisers. As the accompanying table of currently available direct property funds shows, products that are open indefinitely have become a lot more common, and the level of minimum investment they will accept has plummeted.

The closed-end syndicates prevailing in the 1980s often didn’t want to know you if your cheque was under $100,000, according to operations manager at Property Investment Research, Doug Higgins.

Now, just $10,000 is the typical minimum, and Higgins adds that the rise of open-ended products has presented important flexibility and choice to would-be property investors.

“There are two classes of investors. Those who like to know what they’ve got, and don’t want to risk ending up with properties added in by the manager which they might not be comfortable with — they are better off in a closed-end fund. But those who like increasing diversification and like the thought of being able to redeem their money if they have to — for which there’s no possibility in a syndicate — go for an open-ended fund,” he explains.

The fact that most open-ended funds now provide an annual opportunity for investors to redeem their units cannot be underestimated in their new-found popularity, Lawrence agrees.

Meanwhile, new exchanges have improved property liquidity and also forced a change in industry jargon, he adds.

“You can’t refer to ‘unlisted’ funds anymore, because the fact is you’ve now got the Newcastle, Bendigo and increasingly the Australian Pacific exchanges where units in the funds can be traded. We refer to ‘ASX’ and ‘non-ASX’ funds these days,” Lawrence says.

Having rejuvenated so much, some are now openly questioning whether non-ASX property funds can maintain their pace of growth.

The direct funds have long lagged the LPTs in looking overseas — Higgins explains that capital raisings for direct funds continue to be much smaller than for LPTs and, while there was enough good local property on hand, there was no need to scare investors with unfamiliar foreign assets.

Now that most decent local property is heavily competed for, and direct yields have been squashed below 8 per cent (not far from the 6 per cent level typical for LPTs), the non-ASX funds are expanding their radar screens to stay relevant.

Recently, Centro’s 32nd unlisted shopping centre fund bought malls in California; its 34th has gone shopping in Seattle. On home turf, Lawrence says the obvious demographic imperative will see nursing home funds do massive business.

IWL’s Sebire says he will continue to recommend direct property funds provided they keep doing what they have done for the past 20 years, where they provided a return somewhat below equities (10 per cent versus 13 per cent), but did so with a fraction of the risk and volatility.