Until some of the poor management behaviour endemic among unlisted property funds is addressed at the individual fund level, the sector will continue to encounter perception problems, according to Jason Huljich, CEO of Centuria Property Funds.

And as a consequence, Mr Huljich warned that both advisers and investors may miss out on the very real benefits that a well managed unlisted property fund has to offer: benefits such as steady returns, low volatility and genuine diversification. This is especially the case in the current environment, when there are strong pockets of genuine opportunity in commercial property, at the same time as limited growth in the equity market to date this year which is causing many investors to look for alternatives.

“It’s quite clear to us, and has been for some time, that as an industry we need listen to investors and put their rights first,” Mr Huljich said.

“There’s a pressing need for solutions to some of the fundamental flaws in the management of unlisted property investments, such as excessive and unfair fees, lack of investor control over even the most blatantly incompetent managers, ‘poison-pill’ provisions and poor governance that has led to a very concerning lack of manager transparency, to name a few.”

To address these issues, Centuria announces the launch of an industry first: a major investor rights initiative that includes four core amendments to management practice for its new funds – and it has called on other fund managers to do the same.

“Our investor rights initiative covers those areas that our own investors told us were the chief causes of concern,” said Mr Huljich.

The Centuria Investor Rights Initiative

1. Investor control over the Responsible Entity

In most funds, under the Corporations Act, the support of 50 per cent of all units held is required to remove the Responsible Entity. This is an onerously high bar that in practice can lead to situations where a patently incompetent incumbent remains. For example, even where 80 per cent or more unit holders who do vote, want to vote the manager out – if this still does not represent 50 per cent of the total unit register, the vote will be unsuccessful. Centuria has reduced the voting level required to remove Centuria Property Funds to 35 per cent of all units, and 50 per cent of units who actually voted.

2. Responsible Entity performance fee structures

Centuria believes that performance or success fees should be designed to align the interests of investors and the Responsible Entity. However, in practice this is a historically grey area in which funds have been able to charge the fee even with very low performance, because the specifications surrounding when such fees will be triggered are less than clear. In Centuria’s case, a performance fee will be charged only after investment costs are recovered AND there is a minimum 10 per cent Internal Rate of Return (IRR) per annum to the investor.

3. ‘Poison pill’ provisions

Many funds have ‘poison pill’ provisions which require the relevant fund to pay the Responsible Entity, even if the Responsible Entity is removed by a vote of investors prior to the end of a fund. Centuria’s funds do not include poison pill provisions, and in its view, no reputable fund should.

“We’ve seen big shifts in the unlisted property sector, with continuing consolidation to the point where there are only three or four large active unlisted fund managers that have survived and are doing well,” Mr Huljich said.

“As a consequence, investors can begin to approach the unlisted property landscape with a higher level of confidence than ever before. Credit providers will not support over-geared acquisitions, nor will they entertain allocation of scarce credit allocations for dubious managers.

“We believe that making changes to address these problems is the next step in the major shake-out the sector is now experiencing. Once practices have been changed to ensure that investor rights are at the centre of the management model, we believe that the sector will be able to deliver investors the full degree of its considerable potential,” said Mr Huljich.

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