Listed versus unlisted property

The listed and direct property sectors continue to face challenges, but it is not a case of either or, writes Caroline Munro.

While some property investors are averse to listed property because of its correlation with the general market, and while others have concerns about the illiquidity of direct property, industry experts mostly agree that both will continue to have a place in portfolios.

Charter Hall Direct Property chief executive, Richard Stacker, says traditionally asset allocation in property was between 10 and 15 per cent, split evenly between listed and direct property.

However, volatility has created uncertainty and while advisers like the liquidity of real estate investment trusts (REITs), they are not keen on the impact of volatility.

In turn, he says interest in direct property continues to be hampered by frozen funds and liquidity concerns.

BT Investment Management property portfolio manager, Julia Forrest, says while Australian-REIT (AREIT) managers made some costly mistakes during the global financial crisis (GFC), preferring direct over listed “may be throwing good money after bad”.

“There’s definitely a role for both, and I don’t think you can just have unlisted because as we saw in the GFC liquidity really matters,” she says.

“These vehicles just aren’t liquid — there were massive waiting lists of people who wanted to exit these funds when equities collapsed, where people found themselves massively overweight in property. You need both.”

Listed and direct properties have complementary characteristics in a portfolio and it’s not a case of “one or the other”, asserts AMP Capital Investor’s global portfolio manager for property, Brett Ward.

However, he says the key benefit of listed property is liquidity.

“If I look at the listed market more generally, listed markets have good access to capital, both equity and debt, which is a key support for the continued recovery in values,” he says.

“The second benefit from a global standpoint is diversification — investors could optimise portfolios.”

Forrest says in the current environment the benefits of listed property extend beyond liquidity, scale and diversification.

She asserts that not only are the majority of trusts trading at a discount to net tangible assets (NTA), providing buyers with significant opportunities, but listed property enables investors to avoid stamp duty and many transaction costs, and provides exposure to foreign markets through REITs that will see income and asset values rise over time as vacancy falls and rents gradually increase.

She adds that the AREIT sector also benefits from managers “highly skilled” in asset, property and development management.

“I just think that there’s more opportunities at this part of the cycle in the listed side as opposed to the unlisted side, just in the gap between the discount to NTA,” says Forrest, adding that listed property also provides more investment opportunities as it is quite difficult in the unlisted space to gain exposure to a portfolio of high quality shopping centres, for example.

Charter Hall Group’s joint managing director, David Harrison, however, asserted that the real opportunities going forward are in the unlisted space.

“Our view is that the unlisted market is providing some of the highest prospective returns that we’ve seen for a long time. And that’s what’s going to drive the attraction around direct property,” he says.

He adds that managers are changing the liquidity structure in unlisted funds to move away from what he describes as the “in perpetuity” unlisted funds without a definite fixed term.

For Australian Unity’s general manager of property, Mark Pratt, a preference for property lies in that fact that it not correlated to the general market.

“If you want to invest over the long-term, you want to be certain that when you want to redeem the investment you’re getting the true value of the asset, rather than see its performance impacted by a bunch of other factors,” he says.

“I think there’s now a clear delineation as to why you would invest in listed and unlisted property.”