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NEW: Scott Keck

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I am sounding a warning here that will not make me very popular, but here goes. Beware of property trusts.

A misconstrued investment vehicle

I am sounding a warning here that will not make me very popular, but here goes. Beware of property trusts.

Five years ago property trusts were simple vehicles that were managed conservatively. They wholly held Australian property, rent was collected on behalf of the unit holder and paid out regularly, capital growth was enjoyed and properties, when sold, were very conservatively geared.

Now the whole thing has shifted. Too many property trusts are now highly geared, being run by adventurous management and are investing in properties at overseas locations where they carry foreign currency risk – even taking hedging into account.

People need to understand that they are a foreign concept to the property trusts of five years ago, and that they carry higher risk. Too many people have in their minds what an old property trust used to be and are pouring money in based on that recollection. They are carrying an old image into a new product.

Now this is not to say they won’t work. But I don’t think this formula has been proven yet as a good investment strategy. And it has not been operating long enough to justify the huge amounts of money pouring in.

And this is the danger. They are attracting huge amounts of funds, particularly from super funds, which are placing enormous amounts of money into these type of trusts.

People need to ask some sensible questions. How much property in the portfolio is passive and how much is being developed? A minimum of 60% of the property should be passive – already developed and leased, such as shopping centres, office buildings and industrial estates. The higher the passive amount of property, the lower the risk.

Also ask how expert is the management? Are they old names like Lend Lease, Frank Lowy, Stockland? Or are they new names? Go for the old names – again that lessens the risk.

Then ask where are the assets located? There is more money in these trusts now being invested in developments around the world. You would rather have property in Chadstone (a large Melbourne-based shopping centre) than southern Spain.

It’s not that there is not a role for development. But if managers are going to undertake a lot of development there needs to be a lot of expertise managing the development.

So here is the warning. Don’t be blasé. The average Joe Blow goes to financial advisers, and that’s it. They don’t ask questions, they don’t ask where their money is going. But they need to. The new model has yet to be proven.

 

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