Buy a slice of real estate but without the drama
Residential real estate trusts have arrived.
RESIDENTIAL rents have risen sharply in Australia’s capital cities as vacancy rates have fallen to their lowest level in this decade.
With vacancies standing at 2 per cent or less, this seems a logical time to enter the residential property investment market. But is it?
With rising interest rates and a lack of capital gains, investors are shunning residential investment.
But for those who still want exposure to rising rents, there is now an option.
The first unlisted retail vehicle, known simply as Residential Trust of Australia, is now on the market.
With a minimum of $10,000, investors can buy exposure to properties in eastern seaboard capital cities’ inner suburbs.
Fortuna Funds Management, based in Perth, and partly owned by financial services company, Ascalon (in turn partly owned by St George Bank), is offering 400 million units at $1 each. However, Fortuna executive director Brett Whitford believes it will take time to get to the $400 million target.
With seed investment from its foundation investors, it plans to buy about a dozen homes in Sydney and Melbourne, priced at $300,000 to $600,000.
Investors buy into a rental income stream, enhanced by capital returns, for regular returns.
And, more so than for other property trusts, fund managers say residential returns will come from capital gains.
In the case of RTA, its adviser, Melbourne-based property asset consultant Ken Atchison, says the trust aims for gross rental returns of 4 per cent and is banking on capital appreciation to deliver a total annual return of 9 to 10 per cent.
“It has taken two years to bring this trust to fruition, and it will take many more years to develop into a size envisaged by its manager,” he says.
In August, Westpac launched its wholesale Westpac Residential Property Trust (WRPT), to invest in housing for Australia’s defence personnel.
The trust’s core assets are 200 properties purchased from the Defence Housing Authority for $97 million.
Its long-term strategy is to build its portfolio to $500 million.
Westpac has designed WRPT for institutional investors with a minimum investment of $500,000.
Fund manager Lance Vassaroti says the trust hopes to raise $300 million from some of Australia’s largest institutional investors, and debt of $100 million for the open-ended trust.
Opportunities for retail investors are in the offing, as Westpac plans to launch a retail trust with a different set of residential assets, “probably early next year”.
The idea will be to mimic the residential investment market in Australia.Other residential property trusts are in the planning stages.
Estimated to be worth $2.5 trillion, residential properties are the largest class of investment in Australia, followed by fixed interest at $2 trillion, shares at $1.4 billion and commercial properties at $350 billion.
In a report for Fortuna, Atchison says residential properties returned on average 12.2 per cent a year from 1986 to 2005.
In the same period, listed property returned 13.3 per cent and Australian shares 12.5 per cent.
Similarly, Vassaroti says that, historically, residential property has shown a gross total return of about 13.5 per cent.
“The biggest attraction is that the sector has no correlation with movements on the stock market or the commercial market. Residential property moves at its own pace,” he says.
Other studies, prepared for fund manager Rismark International, have all reinforced the stability of the residential property market.
Research by Greenway Financial Group, which hopes to launch a shared equity mortgage trust, shows annual property price appreciation of 6 per cent, even through the 1930s Great Depression, over the past century.
But the sector poses formidable challenges to fund managers who struggle to find the right formula to make residential property work within a trust structure. It also poses risks for retail investors. Clearly, the investor relies on the manager choosing quality properties in capital growth locations which will always be tenanted.
Other managed residential sector ideas include shared equity mortgages which are on the way.
Residential trusts are an integral part of the real estate investment trust (REIT) sector in the US and Japan. While the Australian model aims for landed properties to capture capital gains, in Japan and the US, trust managers like apartments.
In fact, apartment REITs are the fastest growing sector of the US REIT market. Ron Kuykendall, vice-president of US-based National Association of Real Estate Investment Trusts, says apartment REITs enjoyed a total return of more than 34 per cent in the first three quarters of this year.
“The apartment REIT sector continues to benefit from higher interest rates and reduced affordability of single family homes, which leads many consumers to defer home buying and rent apartments,” he said.
Florence Chong
© The Australian
April 5th, 2010 at 1:44:20p04
This is a fantastic post! (I am coming back to reblog this one in a bit… :D) Have a great Easter!