Platforms a double-edged sword for unlisted property

Platforms appear to be both the problem and the solution for financial planners looking to diversify client portfolios into alternative asset classes, such as unlisted property syndicates and funds, according to a recent breakfast panel hosted by research firm Property Investment Research (PIR).

Chaired by PIR with panel members including Richard Stacker of Charter Hall Direct Property, Stuart Brown of Westpac and Brad Matthews of AMP Research, the panel discussed the outlook for the unlisted property syndicate market, with an audience of investment advisers, HNW investors and fund managers.

One of the biggest issues the panel discussed was the gatekeeper role retail investment platforms play, in determining whether advisers are able to easily access investments in unlisted property syndicates and funds for clients.

“Advisers are looking at how they can best scale their business and gain the most efficiency and for a greater number this is achieved by investing on platforms. At the moment we’d say direct property is on the fringe of the mainstream investments for planners and a key reason for this is because of the lack of assets offered on platforms,” said AMP Research’s Brad Matthews.

Getting unlisted investments on platforms requires a collaborative approach 
Charter Hall’s Richard Stacker said there was opportunity for unlisted products to get on to platforms but it needed to be a collaborative process.

“Product providers need to work alongside dealer groups and platform providers to ensure the structures of new products meet the needs of investors but also the platforms, to help bring direct property investments into the mainstream financial planning space.

“We’ve already had strong traction with platforms for our Direct Industrial Fund (DIF1) and now DIF2, and we are seeing increasing flows from that area as planners use this efficient model for their clients to look for alternatives to term deposits where they have also invested via a platform,” Stacker said.

Commenting on the quality of investments available in the current market, Matthews said he didn’t believe liquidity was the area holding unlisted investments from inclusion on platforms.
 
“Property investments coming out at the moment are of a higher quality and more client-oriented than previously; however, this hasn’t translated into strong representation on platforms. In the past liquidity was a critical characteristic for getting on a platform, however it shouldn’t be the case that something has to be liquid to get onto one, providing investors are aware of the liquidity restrictions,” he said.

Stacker said there were opportunities for product providers to be included on platforms, provided they were willing to design product around platform requirements.

“Charter Hall has spent a lot of time with platforms and we are seeing increasing flow from that area as planners gravitate to platforms for efficiency and alternatives to term deposits,” Stacker said.

Low interest rates bring strong interest in unlisted property 
According to Westpac’s Stuart Brown the ongoing deposit war of the last few years amongst the big four banks had made term deposits very attractive for investors. However Brown believes as the banks become more comfortable with their capital structures, the reliance on term deposits will reduce.

“I’d say all the big banks have reached a level with their capital structures they’re now comfortable with. Our economist is forecasting one more rate cut this year so term deposits will probably come down a bit more with that,” Brown said.

With the current low interest rate environment driving investors and their advisers to alternative sources of growth and income, the panel consensus was unlisted property syndicates and funds would continue to experience strong interest.

Since 2012, the unlisted property syndicate sector has seen strong activity as a result of improved property fundamentals, lower debt costs, and increased appetite from retail investors for higher income yields.

PIR estimates since January 2012, unlisted property syndicates and retail funds have raised between $450-$500 million in equity, with newly launched syndicates often promising distribution yields of 8% and above. Figure 1, below, shows an overview of the unlisted retail sector as at 31 December 2011. PIR is due to release the updated 2012 figures later this year.

According to Stacker, demand for unlisted property syndicates and funds is increasingly being driven by SMSF investors, with Charter Hall seeing strong interest from trustees and their advisers. He attributed this to SMSFs’ natural affinity for property investments, long term investment horizon and favourable tax characteristics.

“The opportunity lies most for people initially in the accumulation phase, as they can get the tax deferred benefit of investing in property. Once they move into the pension phase, having capital gain returned, tax free, is a huge advantage and one that probably needs to be sold a bit better,” he said.

In conclusion, Matthews said:”Direct property is a fundamentally good investment for clients. It provides what investors are looking for, stability with inflation linked returns, and syndicates have the potential to do that so if we can get the structure and expectations right, there’s a real opportunity.”