Real Estate Investment Trusts or REIT can provide potentially high returns for investors seeking to diversify their portfolios, but it isn’t always a straightforward process.
Real Estate Investment Trusts can offer investors a way to get access to the real estate market without having to own physical property. Accrutus Capital will discuss listed and unlisted property trusts, and why you should consider investing in one. We’ll also look at the benefits of the various structures;
- understanding the different types of property trusts available in Australia
- considerations for tax implications associated with REIT investments
- strategies for investors and how to diversify your portfolio
- example for ‘Convenience Plus’ and unlisted managed trusts as an alternative for diversification.
Real Estate Investment Alternatives
Are an increasingly popular way to invest in the property market. The structure provide investors with access to a range of properties, from residential and commercial buildings to retail centres and industrial warehouses, without having to commit large amounts of capital.
They offer many advantages such as diversification over multiple asset classes, mitigating risk by spreading investment across different locations, and reduced transaction costs due to economies of scale. There is also potential for higher returns compared to traditional forms of property investing due to leveraging the expertise of professional fund managers and the ability to tap into larger deals which would otherwise be difficult for individual investors.
Benefits of Investing in a REIT
• REITs offer investors a range of high-quality real estate classes such as residential, industrial, commercial and shopping centres, by purchasing units in a Trust Fund.
• They are highly liquid and transparent, making them more attractive than traditional forms of property investment.
• Leveraged opportunities from the professional fund and asset managers can help increase returns.
• Regulation by the Regulator provides increased protection ensuring investment compliance and stringent governance and reporting standards.
Understanding the different types of Property Trusts in Australia
A property trust is a pooled investment vehicle that allows investors to invest in a portfolio of income-producing real estate assets. These assets could include offices, shopping centres, hotels, healthcare facilities, etc.
They provide investors with a diversified portfolio, professional management, and consistent income distributions while offering degrees of liquidity dependent if the investment into an unlisted or listed REIT.
An unlisted property trust allows investors to pool their money into a Managed Investment Fund that acquires substantial commercial property assets that they couldn’t buy on their own.
it is important to understand the different types available before making any decisions. These property trusts can be categorized into wholesale, retail, direct tax-deferred, and hybrid trusts, each offering varying benefits that may suit your investment requirements.
Listed Property Trust A-REIT’s are publicly traded on the Australian Securities Exchange (ASX) and can be bought and sold like other publicly traded stocks. Investors can buy and sell shares in REITs, and the prices are determined by market supply and demand.
Unlisted Property Trusts are not publicly traded and are offered by private real estate investment companies, or fund managers to a select group of investors, such as institutional investors or high net worth individuals.
Knowing which type best suits your investment needs can help you maximize returns and limit risk when adding real estate to your portfolio. Consult your accountant when investing to understand the taxation implications.
The Australian financial and tax regulations governing managed investment trusts or schemes can be found on the Australian Securities and Investment Commission’s (ASIC) website. While detailed taxation guidelines can be found on the Australian Taxation Office website.
Strategies for Investing in REITs
Diversification: Investing in REITs allows investors to spread their risks across various property sectors and geographical locations, reducing the impact of a downturn in any specific sector or area.
Income: Invest in REITs that provide consistently high dividend yields, helping to supplement other income sources and could serve as a hedge against inflation.
Growth Prospects: Identify REITs with strong growth prospects by assessing the quality and potential of their underlying assets, as well as the capability of the management team.
Taxation Benefits: Consider the tax advantages associated with REITs, such as tax-deferred distributions and the ability to claim deductions for property expenses and borrowing costs .
Considerations for Investing in REITs for tax benefits in Australia
- Understand the tax treatment of REITs
A-REITs are generally taxed as trusts, meaning they are required to distribute at least 90% of their taxable income to investors. This income is taxed in the hands of investors at their marginal tax rate, which could be lower than the company tax rate paid by direct property investors.
Additionally, investors can claim deductions for expenses related to their investment in the property trust, such as management fees and borrowing costs.
- Consider investing in tax-effective structures
Investors can invest through tax-effective structures such as self-managed super funds (SMSFs) and family trusts. SMSFs offer significant tax benefits, such as concessional tax rates on investment earnings and access to franking credits. Family trusts can also provide tax advantages by allowing income distributions to be split among family members, potentially reducing the overall tax liability.
- Evaluate the tax implications of different types of REITs
Investors should consider the tax implications of investing in different types of property trusts. Some may focus on properties that generate tax losses, which can be offset against other income to reduce the overall tax liability. However, investors should be careful to avoid investing solely to generate tax losses, as this may be viewed as a tax avoidance scheme.
- Assess the investment strategy of the Trust
Investors should carefully evaluate the investment strategy of the property trust to ensure it aligns with their investment goals and risk tolerance. Some may focus on specific property types, such as retail or industrial, while others may have a more diversified portfolio. Additionally, investors should consider the geographic diversification of the assets and its exposure to different markets.
- Monitor the performance of the Trust
Investors should regularly monitor the performance of the REIT to ensure it continues to meet its investment goals and objectives. Key metrics to consider include the distribution yield, Funds from Operations (FFO), price-to-FFO ratio, occupancy rates, and rental growth. Additionally, investors should be aware of any changes in tax legislation that may affect the tax treatment of their investment.
Register your Interest
How investors can diversify their portfolio into ‘Convenience Plus’ asset classes
FRP Capital, a leading investment and asset manager specializing in convenience-based shopping centres around Australia, is located in highly valuable urban locations, such as close to transport hubs, universities, industrial and commercial precincts or entertainment complexes. Offer an excellent showcase of an unlisted portfolio. Their latest offering is 4.9klm from Adelaide’s CBD. This highlights the experience, and knowledge of the management team by acquiring quality assets offering strong occupancy of 96%.
FRP Capital acquires off-market properties that provide high levels of rental income while also offering the opportunity for capital growth and tax benefits over the longer term.
Unlisted Real Estate Investment Trusts
As an asset class, unlisted property delivered total 12-month returns of 17.7 per cent in FY22, outperforming direct and listed property, Australian and global equities, fixed income and cash returns. Importantly, this outperformance stacks up over a five-year period, with unlisted property producing a five-year annualised return of 16.6 per cent. (Source: Livewire – Property).
A recent acquisition into the FRP Capital Managed Trust Fund portfolio is the former brickworks factory converted in 2015 into a thriving retail destination. This acquisition demonstrates the importance of expert asset management and the ability to identify and capitalize on unique investment opportunities. More information about the Brickworks Marketplace Shopping Ctr here.
Brickworks Marketplace Fund offers investors high yields and tax-efficient distributions. As an unlisted, Trust is required to distribute at least 90% of its taxable income as dividends to investors, providing a tax-efficient investment vehicle. The trust has also provided investors with attractive dividend yields over the years, with an average distribution yield of 6.07% annually.
Accrutus Capital, the Corporate Advisory assisting FRP Capital (ACN 643 942 116) (The Investment Manager), is an authorised representative #001283664 of Lantern RE Limited, holder of AFSL Licence #386569.
Accrutus Capital specialises in raising capital from wholesale and sophisticated investors under Section 708 of the Corporations Act 2001.
By reaching out to Accrutus Capital you can gain access to their select portfolio of exclusive investment opportunities in the Australian real estate market.
In conclusion, understanding the alternatives in real estate investment, and implementing the right strategies can lead to fruitful investments with diversified income sources and attractive taxation benefits.
Partnering with an experienced corporate advisors such as Accrutus Capital can further amplify your alternative real estate investment options with unlisted off-market opportunities.
This article is intended for sophisticated and wholesale investors user Section 708(6,8,10) of the Corporations Act 2001. The information provided in this article is of a general nature and should not be relied upon as professional advice. You should seek independent advice tailored to your specific circumstances before making any decisions. Accrutus Capital and FRP Capital do not accept any responsibility for any loss that may arise from reliance on the information contained in this article. We do not give any advice or recommendation.