Putting your trust in property

Most of our listed property entities are trusts, not companies. But investors should be aware that there are alternatives, writes ANNE GIBSON.

People wanting to invest in listed property will almost always choose a trust because trusts make up the lion's share of the dozen property entities listed on the share market.

Trusts, such as AMP Office Trust, Kiwi Income Property Trust, National Property Trust, Newmarket Property Trust and Westfield Trust, dominate the listed scene.

They are a pooled investment with a professional manager looking after the assets. Investors get units which they can trade on the exchange. This makes them like shares because investors can benefit from any capital gain in the price of their traded units.

Investors also get distributions of income.

But some people are beginning to wonder if putting their money into a trust is the best use of it when it comes to buying real estate and if the company structure is not perhaps preferable.

Take, for example, the February 25 issue of New Zealand Property Investor which analyses trusts, questions the reason for so many real estate trusts rather than companies being listed on the sharemarket and recommends that many of the trusts be wound up and re-established as companies.

That way, investors might get better returns, more transparency, more independent boards of directors and save costs, without any need to pay a trustee.

The article questions the structure of trusts, the cost of running them and the sale of the management contract, as occurred this year when the management of Kiwi Income Property Trust was sold to Australia's Colonial First State Property.

Ultimately, the article questions whether investors do well out of trusts and particularly criticises the fact that the Kiwi unitholders had no say in the sale.

"The investors were not even asked to vote on the change in the owners of the management company and thereby have no say in the change in governance. This seems entirely wrong," the article said.

"The property trust structure delivers no palpable benefit to investors. It does not necessarily provide any higher degree of security for investors.

"The trustee does not guarantee the performance of the trust nor protect the assets from poor management or external claims such as from creditors. Perhaps investors in listed property entities should forgo the trust structure and rely upon company law and NZSE listing rules, together with independent governance, for their protection and remove the influence of wholesale fund managers from these more transparent investment undertakings."

When Kiwi passed its management contract to Colonial, questions were raised - but never answered - about the price of the deal, although various analysts at investment and sharebroking firms claimed to have a rough idea.

The only thing investors knew for sure was how much was paid to the management annually. Kiwi's annual report lists as an associated party transaction the payment of $5.9 million to the management company, Kiwi Income Properties, up on the previous $5.4 million.

A contrary view about trusts is taken by Shane Solly, an investment manager at ING (NZ) - the new name for Armstrong Jones - which has about $200 million invested in property here and in Australia.

Listed property trusts provide an excellent way of investing in a wide range of properties, Solly says, allowing investors to diversify their property assets by location, size and sector, as well as management style. All this for a relatively small outlay which may be a few hundred or thousands of dollars.

"Listed trusts have delivered a useful outcome for investors," he says, comparing the performance of the trusts with the likes of one of the listed property companies, Trans Tasman, which has not been a good performer for investors, having suspended dividends and regularly posting big losses.

ING analysed the value of listed property trusts and said they filled an important gap.

The value of a trust in the listed property trust market is typically influenced by a range of factors, such as interest rate movements, market sentiment, quality of the properties and tenants, size of the trust, takeovers and mergers and the relative attractiveness of other investment alternatives at the time.

The trusts are most popular with investors who are looking for a steady income stream, ING says, since the distribution paid tends to be less volatile than dividends from shares, This is partly because tenants with long-term leases help to ensure a stable rental income for a set period.

The steady income makes listed property trusts primarily yield investments, as they have a much higher component of return from income than from value changes.

Yield is the value of the income streams (rent) divided by the value of the property. For example, if a property generates $80,000 a year and it is valued at $1 million, the yield is 8 per cent before tax.

Yield is important in two ways, ING says. First, many property investors - particularly the retired - are looking for income and property is often bought on this basis.

Second, an assessment of yield means that potential investors can easily compare the yields between property and other types of investment.

ING examined how well listed property trusts had performed, and found the results generally more favourable than shares. Its benchmark for the comparison was the New Zealand Property Index, made up of a weighted average of the unit price of all trusts and representing about $1.8 billion, or 4 per cent, of total market capitalisation.

During the past five years, the listed property trust sector - as measured by the NZ Property Index - outperformed the NZSE40 Gross Index. Property rose 4.9 per cent a year compared with the the sharemarket's 3.8 per cent, ING said.

Angus McNaughton, chief executive officer of Kiwi Income Property Trust, says his structure has many advantages.

"Some of the key benefits of a trust structure over a company structure are:An external trustee that protects unit holders.

A structured decision-making and investment process.

ore consultation with the trustee which improves decision-making.

A trust deed which outlines the type of businesses the vehicle can be involved in and often conservative debt levels. Kiwi has a maximum debt ratio of 35 per cent.

Transparency of fees for unitholders. There is no opportunity for the corporate excesses of the 1980s.

"Trust structures have been robust vehicles in Australia over many years. Returns from a trust structure are likely to outperform a company over time given the more structured and conservative approach to investment, debt etc."

ING