Property funds: Direct Vs. ASX-Listed

Put another way, low correlation simply means that prices of direct or unlisted property funds move independently of the external factors that affect the listed share and bond markets.

Direct funds usually have quarterly or monthly income distributions whereas AREITs generally have six-monthly payments. Many retirees greatly appreciate more frequent cash flows and we increasingly find monthly payments are an attraction for investors. 

The other side of the ledger for direct property funds is liquidity, or more accurately, lack of liquidity. Unlisted funds are designed to be held for a term, generally around five years. Funds for investing in a direct or unlisted fund should come from one’s ‘non-cash bucket’.

Some unlisted property funds have regular so-called ‘liquidity events’ or other redemption opportunities. This usually involves a small amount of funds being made available to investors who have an urgent need for cash. These events may happen every 6, 12 or 24 months, but they are not a means for investors to realize a large percentage of their holding.

Of course, the flip side to lack of liquidity is you don’t have the often arduous task of selecting a new, safe and attractive investment. I don’t like the term ‘set and forget’, but in some ways it is what you can do if you choose a good direct or unlisted property fund.

AREITs are listed on the ASX which makes them highly liquid. You can simply call your broker or use an online broker and your position can be liquidated in a moment. This provides portfolio flexibility to adjust your holdings and re-weight an investment portfolio at a time of the investor’s choosing.

The downside of being listed is volatility.

The market price of units can be above or below net asset valuation at any time.

When the market is up, AREITs may trade above net asset valuation. When the market is down, they can trade below valuation. This characteristic of course may not necessarily be seen as a negative: units trading below valuation arguably present a buying opportunity; units trading above valuation arguably present an opportunity to sell above fair value. 

As a rule of thumb many advisers will suggest splitting your investment-grade property holdings between direct/unlisted property funds and AREITs.

If liquidity is a critical issue it makes sense to focus on AREITs. Conversely, if low volatility is a priority, unlisted property funds should form the major holding. Both offer strong levels of ongoing distributions.

The final issue of course is how much investment-grade property to hold.

Major super funds, the Future Fund and other major institutions generally hold between 5 per cent and 15 per cent of their portfolio in investment-grade commercial property. It’s a benchmark that is worth serious consideration, depending on your own position and the views of your adviser. Charter Hall currently has four major direct or unlisted property funds open to investors, with distributions currently ranging from 5.8% p.a. (Direct Office Fund) to 6.9% p.a. (PFA Fund) PLUS capital growth, making projected total returns of between 9% and 10% p.a. over the term of the fund.