Investing in infrastructure and property, should investors invest in listed or unlisted vehicles?

Investing in infrastructure and property, should investors invest in listed or unlisted vehicles?

November 2019

It’s entirely in keeping for former Labor Treasurer and Prime Minister Paul Keating to call a spade a shovel. In an interview to celebrate 50 years since he was elected to Parliament in 1969, he said monetary policy (cutting interest rates) had run its race. No ifs, no buts. Many suspect he’s right.

What we do know for certain is that the three cuts the Reserve Bank has delivered in this cycle have not lifted sentiment – business or consumer. Although the stimulus effect from rate cuts typically takes time, the steady decline in almost all measures of sentiment suggest it’s not working.

It all adds up to interest rates staying lower for longer, and subdued economic growth – a picture the International Monetary Fund has painted for most of the industrialised world.

For self-managed super fund (SMSF) members, especially those in pension mode, it just reinforces that familiar message – while cash and term deposits might offer capital security, these assets have long stopped being a yield play. SMSFs must look elsewhere for income.

Fortunately, there’s no shortage on offer. Some are riskier than others; they’re the ones offering the higher yields. But aided by specialist advice, SMSFs don’t have to accept the barely positive returns the banks are offering.

In this article, I want to look at infrastructure and property through the lens of listed or unlisted investment vehicles.

Infrastructure as an asset class is attracting growing interest as many of the less developed economies still need basic infrastructure, while developed economies are increasingly investing in maintenance or meeting demand for new types of infrastructure. Think Sydney’s light rail system. It’s predicted that next year annual global infrastructure spending will comfortably exceed $US5 trillion, up from an estimated $US4.3 trillion in 2015. That’s serious spending.

The big super funds often invest directly in infrastructure assets: their steady long-term cash flows make for very good liability-matching assets. And the principle is no different for SMSFs looking for yield. Although direct investment is typically beyond their reach, the mini-sector of ASX listed infrastructure funds, such as Transurban Group (TCL) and Sydney Airport (SYD), are offering yields of 3.9% and 4.2%, respectively at their current share prices.

There are also global listed infrastructure securities that can be accessed via ASX-listed exchange-traded funds (ETFs), with their benefits including low cost, simplicity, liquidity and diversification.

For those wanting to invest in unlisted infrastructure funds, the ASX provides an option via mFunds. Although not listed on the ASX, mFunds, such as the Alpha Infrastructure Fund (7.8% average return over five years with an average annual yield of 3.1%), are bought or sold through the ASX like buying or selling shares. Unlike their listed cousins, the entry prices are much higher, typically $20,000.

Commercial property investment has traditionally been via ASX-listed Australian Real Estate Investment Trusts (AREITs) or direct property funds, also known as unlisted property funds. Like infrastructure investment, there are differences between these two approaches to this investment that SMSFs need to be aware of, typically investment amount, liquidity, volatility, and income distributions.

It’s cheaper to buy an AREIT, with $2,000 a realistic starting point. Most direct property funds will want you to stump up $20,000.

As a listed stock, AREITs’ unit prices change daily in response to market sentiment and the performance and value of the individual properties. By contrast, market movement has little influence on unlisted property trusts, making them far less volatile. Instead of the market setting the unit price, the underlying property portfolio uses independent valuations to determine entry and exit prices.

The flip side of AREITs being held hostage to market volatility is the ability to sell them at any time. But unlisted property funds expect their investors to stay put for a set term (usually five years). They can have so-called “liquidity events” where you can sell, but the fund will need convincing it’s an emergency.

Another income alternative are investments trusts, with Thinktank offering two – a High Yield Trust (effective 7.4 per cent yield) and a more conservative Income Trust (effective yield of 4.5 per cent) with both paying interest monthly. They have three main attractions – yield, simplicity, and those wanting yield without further exposure to direct property. Unlike unlisted property, there’s the bonus of being able to exit after one year.

We also pool funds to ensure investors (many are SMSFs) are not exposed to individual loans, appreciating how important capital preservation is to SMSFs, especially those in pension phase.

All investments come with risk, and yield is usually commensurate to the risk; the higher the yield, the greater risk – an old market maxim it pays never to forget. But by getting specialist advice and doing your own research, the investment wheat can be sorted from the chaff to ensure a better yield than today’s cash rate.

 
Written by Per Amundsen, Head of Research, Thinktank
 
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