A beginner’s guide to unlisted real estate funds

Most people are very familiar with residential real estate, with house price movements often being discussed around dinner tables. However, it is not the only type of real estate and there are many other types of property that investors can invest in.

Business real estate includes direct real estate assets such as factories, office buildings, warehouses and shopping malls. Although all of these properties involve substantial up-front investments, this does not necessarily preclude the retail investor from enjoying investment gains when these properties increase in value. To do this, they can in particular use an unlisted real estate fund.

What is an unlisted real estate fund?

An unlisted real estate fund is a pooled fund of a number of different commercial properties. The properties of the fund are not listed, nor is the fund itself. It can also be a single commercial building.

Many unlisted real estate funds will invest in a particular type of commercial real estate – such as offices, shopping centers or health centres. There are unlisted global property funds as well as a number of Australian national funds. The fund manager offering the fund will purchase the properties and manage them on behalf of the investors.

Commercial real estate can react differently to economic conditions than residential real estate and generally offers investors higher returns on their investment. At around two to three years, leases are also generally longer than for residential real estate, which provides additional security for investors.

How do unlisted real estate funds work?

There are two main types of unlisted real estate funds: closed-ended unlisted real estate funds and open-ended unlisted real estate funds.

In a closed-end fund, the fund manager issues a set number of shares to investors at the start, which are usually with the fund for the duration of the investment. They make a bet on the capital gain the investment will make. A closed-end fund is generally a single-asset fund and will operate for about five to seven years. It may own a single office building or a healthcare facility, for example.

An open-ended fund will generally invest in more than one property and the fund manager does not issue a fixed number of units. They can issue more units as the fund grows and invests in more properties, for example. An open-ended fund operates without a fixed end date and can continue to invest in properties indefinitely if it wishes and has the capital.

Investor returns for any type of unlisted real estate fund will include income, for example rent paid by tenants of the property, and a capital gain when the underlying property is sold.

How do you invest in it?

Like other managed funds, you can invest in unlisted real estate funds directly through the fund manager. If you go to the particular fund manager’s website, you should be able to download the fund’s product disclosure statement (PDS). This will give you detailed information about the fund, including how it is managed, its fee structure and how often it pays out distributions. It may also detail a minimum initial investment, often around $10,000, that you will need to invest to get started.

The PDS also includes an application form and other relevant information that you will need to complete if you plan to purchase units of the fund. You can return the PDS to the fund manager by mail or complete the applications online if the fund manager has this capability.

Some investment platforms also include unlisted real estate funds in their menu so you can access this unique asset class that way.

Get stories like this in our newsletters.