Listed versus unlisted property: balancing performance and volatility
Syndicated property investment options provide investors with access to high value, high quality properties with strong capital growth potential and the ability to attract and retain quality, long-term tenants.
The two favoured vehicles for investors looking to spread risk by investing in syndicated property are listed property funds or trusts – also known as LPTs or AREITs – or their unlisted counterparts.
When it comes to listed vehicles, some issues have become apparent, both from a portfolio construction perspective and when considering returns.
On the portfolio construction side, over the years it has become apparent that, as an asset class, listed property behaves like equities – to the point where many commentators now class LPTs as such.
In tracking the market and the index alongside the equities in the portfolio, they provide no real diversification should the sharemarket begin to slide, as recent performance figures show.
The second issue is volatility of returns, which in the case of listed property, is far higher than unlisted. As an example, the listed property index fell 76% through the worst of the GFC.
High volatility means total returns can be greatly diminished by poor timing of purchases and sales by investors who make decisions driven by strong sentiment – as we have seen in the current market.
So in the case of listed property, while an investor might have the perceived benefit of lower liquidity risk, other risks, such as correlation with a volatile sentiment-driven index, with a poorly performing index, may well countervail it.
The performance of unlisted property, on the other hand, while to an extent reliant on the broader property market, is also dependent on two more rational and controllable factors: the quality of the underlying core assets and the quality of its management.
It is far less volatile and, historically, has offered much steadier returns than its unlisted counterpart, as the chart below shows.
Unaligned to an index, the right unlisted vehicle can offer investors the benefit of genuine diversification throughout the investment cycle.
Comparison of 10-year returns from listed and unlisted property funds
John McBain is the CEO of Centuria.
