Listed vs. unlisted property investment – is one superior to the other?

The performance of commercial real estate is expected to benefit from tighter lending conditions recently introduced for residential property investors, as investors seek income yield but from an alternative source to residential investment property. Additionally, listed real estate within Australia has shifted focus from non-traditional activities and offshore exposure, back to its core business of property ownership and rental income, instigating a much stronger financial position for many trusts and a lower risk profile. With both asset classes showing potential for continued strong returns, which of the two makes the best addition to your portfolio?

What are the benefits of investing in property?

Both listed and direct property can provide key benefits to investors, including:

• Strong and sustainable income potential – yields for both outperform other asset classes.

• Attractive risk-adjusted returns over the long-term – high returns are attracting investors to this asset class.

• A hedge against inflation – income derived from most commercial properties are index-linked to inflation on an annual basis. In other cases, there is an opportunity to increase rental rates whenever a lease term expires and the tenant is renewed.

• Diversification benefits – reducing the overall volatility of your portfolio.

Volatility concerns are unfounded

Currently, there is a belief that listed real estate is more volatile than unlisted real estate. However, we believe this is a myth. The underlying asset is the same whether in a listed or unlisted form. Unlisted real estate appears less volatile because there is a time lag between valuations in unlisted portfolios, whereas shares are marked to market every day. The greater frequency of valuations therefore gives the impression that listed real estate is more volatile than its direct counterpart. While listed real estate can appear more volatile, the benefit of holding this asset is that it does provide investors with much greater liquidity – holdings can be acquired and disposed within a day or two at minimal cost.

How do I know which asset class is the right investment for me?

When choosing which type of investment will suit your preferences, you can think of it like watching the Tour de France. The 21 days of racing that make up the tour being your real estate investment.

• Listed

  If you watch every minute of the Tour you will see the individual races, some days the yellow jersey changes hands, but by the 21^st stage the best athlete prevails. You witness the winner but you’ve experienced volatility along the way. Experiencing this is like being invested in the listed market – if you want minute-by-minute updates you can get them. However, ultimately each stage adds up to the end result.

• Unlisted

  Being invested in the unlisted market is akin to not watching the Tour every day. You watch the start of the race, then the race finish 21 days later.

However, both get to the same end result.

As a long-term investor, you can allocate your assets to listed real estate and not get caught up in the noise of the day-to-day moves if you choose not to. The underlying assets and market drivers are exactly the same.

Conversely, if you are invested in unlisted real estate and you so desire, you could mark the market each day by tracking transactions and deal flow information.

There’s a place for both in a diversified portfolio

The proportion of funds allocated to direct or listed assets within a portfolio varies, depending on investor preference. Key influencers include an investor’s tolerance for illiquidity and preference for time horizons. Investors with a preference for liquidity may prefer to limit their exposure to unlisted assets, and invest more in listed.

Time horizon can influence the degree to which listed and unlisted counterparts might be viewed as substitutes or complements. When performance is viewed from a short-term perspective using monthly or quarterly data, returns on unlisted assets fall behind their listed counterparts and have significantly lower volatility and correlations. Therefore, listed and unlisted assets in the same asset class can behave in a complementary fashion.

Alternatively, over a longer time frame, risk and returns for listed assets and their unlisted counterparts tend to meet, so they become more like substitutes. Nevertheless, there will still remain enough differences in the underlying exposures and the drivers of risk and return to ensure that listed and unlisted assets are never complete substitutes.

For most investors there are likely to be clear advantages from holding both forms, unless constrained by liquidity or other binding concerns. This approach provides investors with greater flexibility to take advantage of any significant difference in pricing between listed assets and their unlisted counterparts.

Source: AMP Capital

About the Author

James Maydew is AMP Capital’s Deputy Head of Global Listed Real Estate, based in Sydney. Mr Maydew commenced in the real estate industry in 2002, starting his career as a chartered surveyor in London working within the capital transactions division of Cushman & Wakefield.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.