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What is an Australian Real Estate Investment Trust (A-REIT)?
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A Real Estate Investment Trust (A-REIT) (formerly called Listed Property Trusts or "LPT") is a pooled investment whose units are listed on The Australian Stock Exchange. The owners of the Trust - unitholders - can trade their units on the exchange in the same way as for any share or other listed security. Investors owning units in the Trust receive benefits from distributions, tax advantages and capital gain in the price of traded units. Professionals who buy, sell and manage property assets with a view to maximising returns for unitholders are called the 'Responsible Entity' (or sometimes Manager). The 'A-REIT index', a weighted average of unit prices in all A-REITs, is now the sixth largest index of The Australian Stock Exchange. It represents almost 5% of market capitalisation.
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What is the difference between an A-REIT and an Unlisted Property Trust?
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Prices for units in an A-REIT are quoted on The Australian Stock Exchange, just like shares in companies such as Telstra, Woolworths and the Commonwealth Bank. Unlisted Property Trusts on the other hand are not listed on an exchange. A major drawback of UPTs is the standard twelve-month maximum redemption period, making the UPTs an illiquid investment. On the other hand, the A-REIT unit prices constantly change as units are publicly traded. A-REIT prices therefore exhibit greater price volatility than those of UPTs.
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What drives the price of an A-REIT?
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Largely the bond price and the relative risk premium drive the traded unit prices for A-REITs. As a general rule, unit prices are expected to approximate those which would provide the same dividend yield of the bond rate plus a few percentage points to account for the extra risk involved in owning A-REIT units as opposed to bonds. Some more common factors include other interest rate movements (which reflect the bond rates), market sentiment, quality of the properties, size of the Trust, takeovers, mergers, litigation and the relative attractiveness of the other alternatives.
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What are the main benefits of investing in an A-REIT?
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An A-REIT may own various types of properties. A Trust may specialise in Retail, Office, Industrial, Commercial or Leisure and Tourism properties in a variety of locations. Alternatively, a Trust seeking to avoid cyclical fluctuations in their unit prices may diversify their portfolio by owning properties in several of these categories.
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Who manages the A-REITs and what are the fees and charges payable?
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Responsible Entities (or Managers) are generally Fund Managers or large corporations. The Manager of the Trust does not own properties. They are owned by the unitholders and are held in trust on their behalf by the Manager. The Manager of an A-REIT is, in effect, a contracted employee of unitholders and can typically be removed by a majority vote of unitholders. Management fees vary, but tend to approximate 0.5% per annum of the gross value of the assets of the Trust. In addition, the Manager may be entitled to the property management fees and performance incentives.
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What returns can I expect over time?
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The main attraction of A-REITs is their steady income from distributions. A-REITs are therefore primarily a yield investment. Capital growth is generally considered a secondary priority. Historically, the A-REIT index has exhibited volatility of about 60% of that of the All Ordinaries Index. Thus, for a 10% decrease (or increase) in value of the All Ordinaries Index, the A-REIT Index would be expected to decrease (increase) by 6%. This makes an investment in the A-REIT market 40% less volatile than an investment in the All Ordinaries.
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When and how will I receive distributions?
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Distributions are paid by the Trust to unitholders either on a quarterly or a semi-annual basis. This can be in the form of either a cheque or direct credit into a unitholders account. Distribution Reinvestment Plans are also an option that the Trusts may offer their unitholders. Under this arrangement, unitholders may choose to have their distributions automatically re-invested to purchase further units, usually at a discount to their current trading price.
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Are there any tax advantages?
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Trusts, because they are not tax paying entities, cannot benefit from tax deductions that arise in the normal course of business. Therefore, the passing on of these tax benefits to the unitholder gives rise to a 'tax advantaged' component to dividend distributions received by the investor. The tax-free component relates to building depreciation allowances. The tax-deferred element derives from plant and equipment depreciation. In this case, tax is paid only when the unitholder disposes their units. The value of this tax-advantaged component compared with the dividend actually paid can be quite high for investors in high tax brackets.
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How can I select the Listed Property Trust that will perform and suit my needs?
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It is always best to contact your Financial Adviser or Financial Planner for your investment and financial needs. Make sure they have access to a dedicated property trust analyst and/or has independent and unbiased research such as that provided by Property Investment Research. Important criteria include yield, potential for growth and current market price of units compared with their value, should the assets be sold on the open market.
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