Unlisted Property Trusts: The Risks, Limitations, and the Alternatives
Over the last few years, I’ve taken on the management of many self-managed superannuation funds (SMSFs), and in doing so, I’ve encountered a particular investment type that often causes significant headaches: unlisted property trusts.
While they’re often sold as compelling investment opportunities with attractive yields and secure leases, the reality is far more complex. From limited liquidity to debt and fee structures, unlisted property trusts can create challenges for investors—many of whom don’t fully understand the risks involved.
The Allure of Unlisted Property Trusts
On the surface, the story behind these investments can sound very attractive. For example:
- A portfolio of assets leased exclusively to government departments with long-term, secure leases.
- Regional shopping centres that offer steady rental income.
These stories give investors a perception of safety and predictability. Often, unlisted property trusts also dangle a seemingly attractive dividend yield, which can make them even more appealing.
However, as we dig deeper, the underlying issues become clearer.
The Challenges of Unlisted Property Trusts
1. Lack of Liquidity
One of the biggest challenges with unlisted property trusts is liquidity—or more accurately, the lack of it. Property, by its nature, is illiquid, especially large assets like office buildings or shopping centres.
In one trust I recently reviewed, access to capital was limited to just 2.5% per year, with other “trigger events” allowing higher withdrawals once every five years. For investors who may need access to their capital, this is far from ideal.
Unlike shares that can be bought or sold quickly on a stock exchange, property trusts require patience and a long-term mindset, which many investors may not have fully considered when signing up.
2. The Debt Problem
Debt equals risk, and many unlisted property trusts carry far more debt than investors realise. I’ve seen examples where rising interest rates significantly impacted the fund’s cash flow, leading to dividends being cancelled altogether.
During the Global Financial Crisis (GFC), we saw property investment products collapse under the weight of their debt. Unfortunately, history repeats itself when debt is misunderstood or ignored. For one of my clients, this meant losing the promised annual dividend, which they had been relying on.
3. Hidden Fees and Expenses
Another challenge lies in the fee structures. In one case, while the trust paid out a 7.5% dividend, it was also charging up to 3% in fees and other expenses annually. When you add in the operational costs of maintaining the assets, it’s hard to see how these trusts generate the cash flow to meet their obligations.
4. Development Risks
Most unlisted property trusts focus on existing assets with established leases and cash flow. However, some trusts include property development projects, which carry a much higher level of risk.
With property development, profit typically only emerges in the final stages—when the last properties are sold. If the project runs into delays, higher costs, or weaker sales, investors bear the brunt of the losses. I’ve seen a recent example where a property trust became insolvent for this very reason, we don’t know what the client will receive back from their investment.
The Alternative: Listed Property Trusts (REITs)
While unlisted property trusts are not our preferred option, investors who want property exposure have better alternatives: listed property trusts, also known as Real Estate Investment Trusts (REITs).
Why Choose Listed Property Trusts?
- Liquidity: Unlike unlisted trusts, REITs are traded on stock exchanges, which means you can buy or sell your investment quickly and efficiently.
- Diversification: You can build a diversified portfolio of REITs across different sectors (e.g., commercial, industrial, retail) and countries, spreading your risk far beyond a single property or story.
- Transparency: Listed property trusts provide clear reporting, so you can understand the balance sheet, debt levels, and fee structures.
- Broader Exposure: With REITs, you’re not just investing in property ownership but also property management and development. This model was key to the success of Westfield Holdings, led by the Lowy family.
- Global Opportunities: By including international REITs, you can access a broader range of properties, from U.S. office buildings to European industrial warehouses, adding further diversification.
Building a Smarter Property Portfolio
The key takeaway is this: while unlisted property trusts can sound compelling, they come with significant risks that many investors overlook—illiquidity, high fees, and high debt levels being chief among them.
If property is to feature in your investment portfolio, consider listed property trusts (REITs) as a more flexible, transparent, and diversified option. With REITs, you can:
- Access property markets locally and globally.
- Spread your risk across different asset types.
- Retain the ability to manage your capital when needed.
Final Thoughts
Unlisted property trusts often rely on a good story—secure leases, high dividends, and stable assets. But as we’ve seen time and again, the reality can be far less stable. Before investing, take a close look at the fine print: the liquidity rules, the fees, and, most importantly, the debt on the balance sheet.
For investors who want property exposure without the headaches, listed REIT’s may offer a smarter, more balanced alternative.
The information provided in this article is general in nature only and does not constitute personal financial advice.
