The Value of Unlisted Property Funds in Investment Portfolios

Our next speaker is John DeMonda, CEO and Fund Manager at GDA Group.

John oversees a diversified organization which delivers specialist expertise across financial planning, accounting and tax, SMSF services, and direct property investment solutions.

John is also the fund manager for the GDA Diversified Property Trust, which has a more than 20-year track record of providing investors with strong and consistent returns from commercial property.

Today, Jon will be talking about the value of unlisted property funds in your portfolio and understanding the differences between listed and unlisted funds.

Thanks for joining us today, Jon.

Over to you.

Thank you very much, Darren, and thank you for having me today.

So as Darren mentioned, today I'll be talking through the value of unlisted property funds and the benefits they can provide to investors in their portfolio.

Firstly, for those who are not familiar with the GDA group, we're a multifaceted financial services organization, as well as an experienced fund manager specializing in commercial property.

As an organization, we've been operating now for over 30 years, and I've personally been a part of GDA for nearly 15.

Now, this is just a reminder that the information that we're going through today is of general nature only and not intended to be used as specific advice.

It is recommended you seek independent professional advice from a licensed financial advisor before making any decisions in relation to the information in this presentation.

Now, if you do consider investing in the fund, then you should first read the target market determination and product disclosure statement in full and discuss the fund with a licensed financial advisor.

Both the target market determination and product disclosure statement are available on our website and on the investment markets platform.

Okay, so let's jump in.

So why commercial property?

Now, before we can understand how an investment vehicle like unlimited property funds can provide benefits to an investor's portfolio, we must first have an understanding of the asset class itself.

So in its basic essence, commercial property is a tangible asset that can bind rental income, often tied to long leases providing stable income, with the potential for capital growth over the longer term.

Rents tend to be contractual that have a fixed or CPI rent increase and that helps protect income during periods of high inflation.

What this highlights is that commercial property can deliver a steady cash flow and long-term capital growth that behaves differently to equities and other major asset classes and it is these characteristics that provide the diversification benefits when blended with other asset classes.

Now

Over the longer term, commercial property has consistently demonstrated strong performance and low volatility when compared to other major asset classes.

Now, what we can see here are the total returns and volatility of those returns of major asset classes over a 10-year period.

And what this shows us

is that industrial property achieved the highest total return of 13.7% per annum, followed by overseas shares, office property, direct property, which is the combination of major commercial property sectors, being industrial, office and retail, and followed by Australian shares.

Now, cash and fixed interest and all commercial property classes provide at or below median volatility of 4.4%, as well as all commercial property classes, overseas shares and Australian shares providing real total returns of 6% or greater.

Now, for those not familiar, real returns are those total returns adjusted for inflation.

Now, importantly, what this is telling us, as illustrated by the graph on the screen, is that property is one of the few major growth asset classes that consistently produces high total returns, and we can see that on the vertical axes in the graph, and the lowest volatility, as indicated by the horizontal axes on the graph.

And the other major growth asset class is with volatility.

And the only major asset class with volatility are below 12%.

And we can see that represented in the cluster to the left-hand side of that graph on screen.

Now, what we see here is basically the same pattern, or the same returns, but income returns.

And it's showing the volatility of those returns over the same 10-year period.

And it very much tells us a very similar short story.

All property classes provide high single returns of a 5.6% or greater and amongst the lowest volatility.

And this is illustrated through the cluster on the graph to the top left-hand side.

And what this represents is the high and sustainable income is attractive for investors who seek consistent absolute returns.

Now rates or a rate I should say, provide a relatively strong income return of 2.3%.

They have a higher volatility than other property classes.

And those not familiar, A-REITs, or Australian University of Australia Investment Trusts, are a listed investment vehicle that provides exposure to property assets, and we'll touch on those a little bit later in the presentation.

Now, what we know from this analysis is that direct property class tends to show low volatility for three practical reasons.

One, valuations are appraisal-based, and by that I mean they are based on independent or directorate valuations, which are performed infrequently, and these could be quarterly, semi-annual, or annual, and that creates a smoothing effect.

Secondly, rental cash flows is contractual.

Many commercial leases are multi-year, and rent reviews tie to either CPR fix, which tempers income swings.

And thirdly, the market for direct property is less liquid, so transactions

are larger but less frequent so prices reset more slowly than daily traded rates.

So this combination of steady contracted income and valuations smoothing produces lower measured volatility than listed property inequities which we've seen so far here.

This creates the ability, when commercial property isn't reduced into a diversified portfolio, to reduce the portfolio's overall volatility and adds stability to an investor's income.

So hopefully that provides some insight into why commercial property is compelling allocation to a diversified portfolio.

Now, I appreciate this is a bit of a busy slide, but what we have here is the summary of some key segments comparing listed and unlisted property funds.

Now this is by no means meant to be an exhaustive list, but it tends to provide a high-level overview.

Now, listed property securities, which include A-REITs, trade daily and can provide diversification and access to index-based or professional managers.

But they reprice with equity markets and can be volatile in certain environments.

Whereas unlimited property funds are priced to asset valuations and can display a low volatility as we saw earlier.

I won't talk to each segment because I'm conscious of time, but one segment I do want to touch on is the underlying investments.

Now it is important to understand if somebody is looking to invest to appreciate or benefit from the traits derived from commercial property as an asset class, then these traits can be diluted when the investment vehicle, when the vehicle's underlying allocation to commercial property is reduced.

Now, unless the property funds tend to have a higher allocation to direct property assets,

typically between 85 and 100%, whereas listed vehicles are normally a lot lower.

And the reason for that is because they are liquid, they require liquid assets to be able to satisfy value redemptions or requests from investors.

Now, this slide shows a performance for the last 10 years for the following sectors.

We have the unlisted property sector, which is represented by the Lonsac Australian Direct Property Funds Index being the purple line.

The list of property securities represented by the S&P ASX 300 A-Read Index represented by the green line.

And then we've got Australian equities being the S&P and ASX 200 being the orange line.

And similar to what we saw earlier, we can see a strong correlation between A REITs and Australian equities, which have provided similar performance and shown similar volatility over this 10-year period on screen.

With unlisted property funds, capital value movements are not as immediate and valuations are just on appraisal like I mentioned earlier.

And these appraisals also require market evidence like comparable assets and transactions.

Therefore, there's usually a lag in the unlisted space normally due to insufficient transaction evidence.

What we see from direct property index is a divergence from the A rates in Australian equities and that smoothen effect I touched on earlier.

Now, I've also included the performance of our own unlisted property fund, the GTA Diversified Property Trust, and that's represented by the goldish line on screen as well.

And I've done that for probably to highlight two things.

Firstly,

Market environments that drive ARITs and Australian listed investments can also drive certain funds in the unlisted property space as well.

And they can be achieved through proactive active product management, any readiness of the market cycles when anticipated, and their underlying composition and quality of assets and underlying tenancy mix as well.

Secondly, the underlying activity of the fund is not necessarily linked to macro drivers.

This can include leasing activity, transaction activity, and completion of redevelopment and development projects when value is eventually realised, either through a sale or an appraisal, or other value adding initiatives undertaken by the fund.

As a fund manager, we aim to have value and opportunities in the pipeline at varying stages to enable opportunities of capital depreciation throughout the term of the vehicle, particularly during times of downward cycles to counter the impact that that might have on the fund.

And what that enables us to do is to create opportunity of the fund to outperform the broader index.

So this now takes us to the fund, the GDA Verso Property Trust.

Now by way of background, as Per Darren mentioned earlier, the trust is an established trust and it's been in operation since 2004 and it's now in its 21st year.

The trust is an open-ended unlisted property fund and its objective is primarily to provide investors with a regular monthly income combined with the potential for long-term capital growth.

Now we aim to achieve this objective by investing primarily in Australian commercial property assets, diversified across geography, sector, type and tenant and we only invest in assets that meet the trust stringent investment criteria and we actively manage those assets to increase their value and income growth prospects as well.

As the trust is not restricted to a particular category, being geography, sector or type, it utilizes a bottom-up approach of property selection to select the most appropriate properties to achieve its objectives.

Now we find adopting a bottom approach allows great opportunity to identify and achieve our performance.

The trust also provides investors the opportunity to partially or fully redeem their units, either through liquidity events, which we offer every five years, and limited withdrawal offers, which is offered every three months.

Now, this is when, under the limited withdrawal efforts, we make an amount set aside, and if that is unsubscribed, then withdrawals are satisfied in full in that quarter.

If they are oversubscribed, then investors are met on a pro rata basis.

and the balance is carried forward to the next withdrawal offer.

Although it is prudent to know that in the last seven years there have only been two instances where withdrawal offers have not been satisfied in full and met on a pro-rata basis basis during one of those quarterly events and they also seem subsequently satisfied in the following quarterly redemption period.

Importantly, investors also have the opportunity to redeem from the trials where they are suffering or likely to suffer hardship as well.

Now we've got a couple of property metrics there on screen just to give a bit of a high level overview.

As of the end of September, the trust had a whale of 4.6 years and is currently 100% occupied.

So there's no vacancy throughout the portfolio at all.

And it's currently got a gearing ratio of 44.23%.

The trust has also been independently researched by SQM and received a four star superior rating.

And more importantly, it's been awarded Fund Manager of the Year in the category of property for the last two years.

Now, as I mentioned earlier, the trust is a diversified fund and it's diversified across a number of areas being geography, type, and tenant.

And we can see the diversification on screen that shows across location and sector.

Now, while vacancy is not able to be completely avoided, we find that securing income from multiple tenancies serving multiple industries in multiple locations aids in reducing the effects of vacancy risk.

And this helps to ensure the trust can maintain an income stream to meet its objective.

The trust has also produced a total return of 10.42% over the last 12 months which outperformed the index by nearly 9% as shown on screen.

The trust has also continued to provide consistent returns over the longer term and the total return of 11.38 per annum over the last 10 years.

And that's me.

Thank you for your time today.

I hope you found today's session insightful, particularly how unlisted property funds can be a long-term diversifier.

But if anyone does have any questions or like any further information from today's session, then please don't hesitate to reach out to myself or a member of the investment team.

Thank you.

Thank you very much, John.

Just a couple of questions on your very informative presentation.

Firstly, we've seen the performance of the trust.

You've shown it on one of the graphs there.

How has the trust been able to outperform the index, particularly as it's been a, I guess it's fair to say it's been a tough few years for the commercial property sector in general?

Yeah, of course.

I wouldn't say there's a single attribute that drove our app performance, but more so a combination.

Diversification has definitely paid a key, and as a diversified fund, it allows us to pivot when we're looking to acquire assets to take advantage of market cycles.

This was particularly important during COVID, where we saw quite a few material changes of property values across the sector, and very consistently as well.

For example, values in the retail sector, specifically discretionary retail, sort of increasing values very early on during COVID.

and that was followed by a very slow recovery.

Whereas industrial assets were very strong early on and that's in the early stages and subsequently tapered off after that.

Now this is sort of a generalization of the sectors itself but having the ability to pivot between sectors

through our bottom-up approach, provides us with a great opportunity to identify assets that could positively contribute to the fund's performance, which we've managed to do over the last few years.

And I guess that, with the combination of

identifying and realising value-add opportunities within existing and new properties.

And that allows us to generate value within assets, whether through expansion from a low-side coverage or improve it to support a tenant's growing business, allows us to counter those market cycles when they arise.

Thank you very much, John.

Thank you, Darren.