A property scheme allows you to buy ‘units’ in an investment run by an investment manager.
Understand how listed and unlisted property schemes work. Weigh up the risks and decide if it’s the right investment for you.
How property schemes work
A property scheme is where you buy ‘units’ in an investment run by a professional investment manager. They pool your money with that of other investors and invest it in property assets. These may include commercial, retail, or industrial assets.
The investment manager selects and buys investment properties. They are responsible for maintenance, administration, rental collection and improvements to the properties. Some schemes invest in property development, which means there are construction and development risks.
Depending on the type of scheme you invest in, you might get a regular income (distributions). These may be paid quarterly or half-yearly. You may also get a capital gain on your investment, if the value of the scheme’s underlying assets increase.
Check the product disclosure statement
The product disclosure statement (PDS) tells you how the property scheme works. Read the PDS to understand:
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the features and risks of the investment
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the fees you will pay
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who will be managing the trust
Listed versus unlisted property schemes
Listed property schemes
These are also called ‘property trusts’ or ‘real estate investment trusts’ (REITs). Property schemes listed on a public market, such as the Australian Securities Exchange (ASX), are:
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easier to value, as you can see what each unit is worth at any point in time
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easier to sell if you no longer want the investment
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subject to market listing rules
Unlisted property schemes
An unlisted property scheme does not list on a public market. This means:
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you can’t easily see whether the value of your investment is going up or down
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it’s not subject to ongoing supervision by a market supervisor, such as the ASX
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it can be difficult to get out of if you want to withdraw your money early
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if you can withdraw your money, it may be subject to strict conditions and fees
How to assess the risks of property schemes
Investment managers for unlisted property schemes must report on benchmarks set by ASIC, and disclose how the property scheme meets them. If the scheme does not meet these, they must explain why and how this affects risk.
Listed property schemes do not have to report on these benchmarks but they can still provide a good checklist to assess the scheme’s risk.
To check how risky a property scheme is, look at:
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Gearing – What the scheme owes (its debts) versus what it owns (its assets). Look for the investment manager’s policy on gearing for each loan it has.
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Interest cover – Can the scheme meet its interest payments from its earnings? Look for the investment manager’s policy on interest cover for each loan it has.
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Interest capitalisation – For scheme loans, if it pays interest during or at the end of the loan period (capitalised). If it is capitalised, how the scheme will be able to repay the interest and capital.
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Scheme borrowing – The key terms on any loan and when the scheme must pay it’s debts.
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Portfolio diversification – The number, value, sectors and locations of the properties the scheme is investing in.
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Valuation policy – How and when the property scheme values its underlying assets.
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Related party transactions – The number and value of loans, investments and other transactions the scheme has with related parties. Look for the investment manager’s policy on related party transactions.
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Distributions – If the scheme pays distributions from income received. If not, how it pays income payments and whether they can continue long term.
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Withdrawing from the scheme – Whether you can withdraw from the scheme and under what conditions.
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Net tangible assets – The scheme’s net tangible asset backing per unit and what this means to an investor.
To see how a fund is performing against these benchmarks, look at the fund’s annual report.
If you need help to understand property schemes, contact us on Phone 07 3340 5169.
Source: Moneysmart.gov.au
Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at https://moneysmart.gov.au/property-investment/property-schemes
Important note: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person. Past performance is not a reliable guide to future returns.
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