“The ‘Recommended’ rating indicates Lonsec has a strong conviction the financial product can generate risk adjusted returns in line with relevant objectives. The financial product is considered an appropriate entry point to this asset class or strategy,” Lonsec said.

Established in 1999, the Fund invests in a diverse mix of commercial property investments including direct assets, unlisted funds and listed property securities.

Mr Ryan Banting, head of portfolio management with Australian Unity Real Estate Investment, says the new rating is timely as the current low interest rate environment has seen many investors re-evaluating their income producing investment options.

“Since its inception, the Fund has provided regular and consistent income distributions, low volatility and daily liquidity. In line with its ‘no surprises’ and risk-aware investment approach, the Fund delivered an income distribution yield of 8.55% for the 12 months to 31 May 2015,” Mr Banting said.

“The Fund is suitable for accumulators with modest balances, investors using a ‘core and satellite’ approach, and retirees in draw down phase.

“Importantly, by not borrowing to invest, the Fund eradicates portfolio risks of lending covenant breaches, negative interest rate movements or refinancing difficulties,” Mr Banting said.

The Lonsec report “noted positively that over longer time periods, the Fund has displayed strong defensive and low risk characteristics” and “has tended to outperform more often in down markets”. Importantly, the report also identified Australian Unity Real Estate Investment as “a well-regarded, experienced and conservative investment team”.

It is “one of a small number of non-institutional unlisted property fund managers that came through the global financial crisis without reputational damage,” Lonsec stated.

“The Fund benefits from an experienced property team providing exposure to a portfolio of diversified property assets. The Fund’s rating is underpinned by Lonsec’s positive regard for the conservatism and experience of the Fund’s investment team. Further, historically the Fund has displayed lower worst drawdowns, lower levels of volatility and better liquidity than peers.

“Over seven years to February 2015, the Fund’s volatility (as measured by standard deviation) was a low 4.84 per cent p.a. with a worst drawdown of 15.41 per cent,” Lonsec said.

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“Recent research* shows that a diversified growth portfolio with no exposure to direct property has an approximately 18 percent chance of experiencing negative total returns, whereas one that contains a standard allocation of 10 percent to direct property has an approximately 14 percent chance of negative total returns.

“And the more direct property held within a portfolio, the lower the chance of negative total returns due to the stabilising effect of rental income.

“It is noteworthy that the same does not hold true of listed property, or Australian Real Estate Investment Trusts (AREITs), due to the high correlation of an AREITs share price with the broader share market.”

Mr Banting said that as well as reducing total volatility, direct property can contribute to higher income returns within a portfolio. (See Chart A.)

“Direct property has generated consistently high income returns with lower absolute volatility than even cash and fixed interest, in contrast to AREITs, over the last 25 years.

“The reason for this is that direct property income returns are directly correlated with the property’s rental profile.  This has resulted in less volatile income returns than AREITs, which have historically had a higher exposure to property developments, overseas markets and other volatile investments.

“As well as providing stable income returns of around 7 to 8 percent, direct property also provides the opportunity for capital growth in the long term as rents are often inflation linked, resulting in increases to capital value.

“As part of portfolio construction, having unlisted retail funds with a longer investment horizon will be able to help boost yield for the portfolio as a whole,” Mr Banting said.

He added that investors hoping interest from overseas investors in Australian property will start to wane, causing prices to come down, are likely to be disappointed.

“The stability of the Australian market, high yields, and transparency, mean that Australia will continue to be an attractive destination for overseas investments, even if the interest rate gap between Australia and the rest of the world starts to close.

“Australian investors who are considering investing in property shouldn’t hold off in the expectation that the flow of capital internationally will dry up,” he said.

Chart A

 Source: Atchison Consulting, S&P/ASX, MSCI, REIA, CBA, UBS, RBA, PCA/IPD

* Property Funds Association Investment Report, Property Performance Research, by Atchinson Consultants – February 2014

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The healthcare property sector has been less volatile than other commercial property sectors.

The benefits of investing in commercial property are often overlooked by SMSF trustees but now could be a good time to consider this investment option, says Ryan Banting, head of portfolio management, Australian Unity Real Estate Investment.

Many investors automatically think ‘residential’ when considering property as an asset class but, with residential property markets at risk of overheating, now may not be the right time to invest in this area, Mr Banting says.

“Trustees who wish to include property exposure in their investment portfolios would do well to consider commercial property.

“Investors may believe that commercial property isn’t suitable for a SMSF because of the size of investment required, the possible lack of liquidity and the difficulties in managing a commercial property, as opposed to a residential property,” Mr Banting says.

However, these concerns can be overcome by taking advantage of pooled investment vehicles such as listed and unlisted property trusts.

“These trusts may be an option for smaller investors looking to diversify their SMSF portfolio into the commercial property space. Both are managed by professional fund managers who invest and manage a portfolio of properties using the pooled capital.

“Other benefits of investing in commercial property through a managed fund include diversity, regular valuations, smaller capital requirement for buy-in, potentially greater liquidity through regular withdrawal facilities, and a stable income from a diversified tenancy base,” Mr Banting says.

Unlisted non-residential properties in Australia have in the past consistently achieved investment yields of around seven percent over the past two years, providing stable and regular returns for investors; at a time when other asset classes have faced headwinds such as falling interest rates and weakness in the sharemarket.

“Unlike listed property funds, unlisted funds are not subject to the share market volatility that listed funds have experienced in recent years; exhibiting performance in line with the underlining investment properties.” says Mr Banting.

Chris Smith, head of healthcare and retirement property at Australian Unity Investments agrees and says the healthcare property sector is a great example of this.

“The healthcare property sector has been less volatile than other commercial property sectors over the past few years, and has outperformed all property on a one, three and five year basis, driven primarily by strong income returns.*

“Healthcare properties are different because they are relatively scarce, operate in a regulated industry and are typically leased to large, stable and wellresourced operators,”

“The ageing Australian population and increasing need for healthcare services ensures high occupancy levels and contributes to higher income yields.”

*Source: IPD index, December 2013

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Good yields and stable values in the Australian property market.

The Australian property market is currently offering investors attractive yields and stable values, with the spread between property and Australian Government 10 year bonds at 310-550 basis points for prime assets, according to Australian Unity Investments (AUI).

“Overall, there is a case to consider investing in property now, given the widening yield differential and the continuing low interest rate environment,” says Ryan Banting, head of portfolio management at AUI.

“Property capital values have stabilised and yields are now back to longer-term averages.

“In this environment, we believe property represents a less volatile total return investment profile than other risk asset classes,” he says.

AUI’s latest commercial property market outlook found some property sectors performing better than others, with strong domestic and offshore investment demand for quality office property, and healthcare property delivering the highest returns.

“Low interest rates make office property investment compelling, while currency depreciation is encouraging foreign investors,” Mr Banting says.

“Many large foreign pension funds are increasing their allocation to direct property, with Australian office markets comparing favourably to foreign markets due to our higher yield, lower vacancy rates, greater transparency, and more recently our falling currency.”

The returns and outlook make the property market an attractive option for Australian investors as well.

“Subdued tenant demand is offset by low supply under construction, and highly occupied portfolios are continuing to perform well as most tenants are seeking to renew their existing leases at lease expiry,” Mr Banting says.

“Office property returns continue to trend around the long term average of 10 per cent, comprised of 7.5 to 8 per cent income and 2 to 2.5 per cent capital growth.”

AUI says healthcare continued to deliver the highest total returns of the property sector of between 8.6 per cent and 12.3 per cent (after fees) over one, three and five year periods to June 2013*. It also delivered the highest risk-adjusted returns of the property sector, over the seven-year period to 30 June 2013*.

Healthcare property also brings portfolio diversification benefits.

“Australia’s ageing population and greater incidence of disability underpin demand for healthcare services, and there is a strong correlation between age, disability and the requirement for healthcare services,” says Chris Smith, head of healthcare and retirement property at AUI.

“Non-cyclical demand for core medical services has protected the sector from external market shocks. Hospitals display a consistent performance profile and typically have long leases of 15-20 years. This insulates the income stream and provides capital value stability.

“The healthcare sector also has the lowest correlation with other property sectors, making it a desirable addition to a diversified property portfolio,” he says

In the retail space, AUI has found that property returns are generally softer due to weak growth in retail consumer sales.

Total income returns from industrial property have been consistent at 8.5 per cent (after fees) in the 12 months to 30 June 2012 and 30 June 2013*. AUI believes the medium term outlook is consistent with this level of return given subdued demand and little change in yields.

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