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By Amy Hamilton Chadwick
Do you want to get into the property market without having to deal with tricky tenants? There is a way, writes Amy Hamilton Chadwick.
Wouldn’t it be lovely to own a beautiful shiny office tower in the city centre? Or an entire shopping centre? Or even a whole retirement community?
Commercial properties like these typically cost many millions of dollars. But anyone can own a tiny slice of a shopping centre or a factory by buying shares in a listed property company.
A listed property company is one that’s traded on the NZX, the New Zealand Stock Exchange, or another international exchange (like the Australian Stock Exchange, the ASX). You can buy and sell shares in these companies online or through a broker.
Different companies specialise in different properties, such as:
· commercial office blocks
· retail outlets, such as shops
· whole shopping centres
· industrial properties, like factories or warehouses
· retirement villages
· healthcare properties, like private medical facilities
Some companies invest only in New Zealand; others have properties and projects overseas.
Two ways to win
You can make money through these listed funds in two ways.
When you buy shares, you can earn dividends, usually paid out twice a year. The value of the shares may also increase, so you can make a profit when you sell them. Of course, they could also decrease in value.
Listed property companies have some of the benefits of investing in both shares and real estate. Their major advantage is that they allow you to invest in expensive commercial property at a relatively low price.
You can diversify across industries, cities, or even countries. And it’s a passive investment – when a property is empty, you don’t need to find a tenant or cover the mortgage, and nobody’s going to ring you in the middle of the night if a pipe bursts.
Easy to buy and sell
Another big advantage of listed companies is that they’re highly liquid.
You can buy and sell them online with the click of a mouse, and the money is there if you need it.
“If you have a chunk of $20,000 in listed property shares, you can sell off $5,000 to take a holiday and keep the rest invested,” says James Kara, Authorised Financial Adviser and investment analyst at Quantum Strategies.
Pay less tax
Another plus is a tax benefit that applies to most (but not all) listed property companies. Those structured as portfolio investment entities (PIEs) don’t pay the same amount of tax as other types of shares, as Kara explains in a rough example:
“Say you’re looking at Kiwi Property Group versus Meridian Energy and both pay a gross return of 7 per cent. Now, on the Meridian shares you will pay 33 per cent tax, so you lose a third of your return.
“On listed property, because of their special tax structure, you might net 6 per cent on your 7 per cent gross.”
Interest rates are key
Just like any property business though, most listed companies have large loans. This makes their costs leap when interest rates rise.
Kara says commercial property in general is currently trading at a premium partly because interest rates have been low for years and partly because of rising land values.
“Underlying assets have been increasing in value, but they haven’t increased as much as share prices have. Some are up to 1.7 times net tangible assets. That’s pretty steep.”
So your chance of buying at a discount right now is low; you’re more at risk of overpaying.
The other disadvantage is the flipside of your passive investment: you have no control over the assets. Returns are often lower than if you bought your own property or went into a syndicate, reflecting the lower risk. Also, you can’t borrow to buy property shares in the same way you
can borrow to buy property.
Invest to diversify
Overall though, listed property syndicates and trusts are a great way to get some diversification into your portfolio.
A good minimum amount to invest is $5,000, says Kara, and it’s vital to do your research. Listed companies themselves must make an enormous quantity of data available to you, and a broker can help wade through all the information and analyse the results.
“It’s usually good to have property exposure in any portfolio,” says Kara, “and listed property gives you that ability not to have your eggs all in one basket.
“The key thing is taking that longer-term view, irrespective of what the share is. Seven years-plus is what you need as part of your growth strategy – anything less than seven years and I’d question whether you should be in it.”