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Property Trusts or Residential Property?

Discussion in 'Managed Funds & Index Funds' started by Norak Bastiat, 16th Sep, 2007.

  1. Norak Bastiat

    Norak Bastiat Well-Known Member

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    According to Perpetual, buying property trusts is much better than getting residential property because of diversification, liquidity, etc. See the link below:

    http://www.perpetual.com.au/pdf/20360_GTI_Prop.pdf

    However, according to an ABC article Shares or property - what's the better investment? it says the following: "If you are borrowing to invest, and many people do, it is cheaper to get a loan secured against property than against shares. This is important to consider if borrowing is part of your wealth creation strategy."

    In other words, if you borrow from the bank and secure the loan against your house, you can get better deals. What I want to know is whether you need to secure the loan against a residential home or whether you can secure it against units in a property trust. Do banks prefer actual residential homes or will they be happy with units in a property trust?
     
  2. bundy1964

    bundy1964 Well-Known Member

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    Houses - cheap loans with high LVR and there are other costs. Generaly need to make interest payments.

    Shares/Managed Funds - higher interest rates, LVR lower and if outside a trust generaly no set up fee. Interest can be capitalised on the loan freeing up cashflow.

    In my experiance it is much easier to get a margin loan than a housing one and having been in both camps I would choose to go the path of shares and funds over housing as an easier option. You can also use a house to secure a loan for managed funds or shares, a best of both world approach.
     
  3. crc_error

    crc_error The Rule of 72

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    I agree with bundy1964.

    I have also had both, and would prefer the shares to direct property option.

    Although property loans are 'cheaper' you need to consider the other costs associated with a property purchase which isn't needed with a margin loan.. ie stamp duty, loan setup fees, valuations, property maintenance, solicitor fees, conveyancing, agent fee's to sell the property etc.. Just the stamp duty alone will add some % to your actual loan cost.

    ie $20,000 in stamp duty over average home hold time, ie 7 years..

    You need to count the REAL cost of holding the proerty.
     
  4. cheeyeen

    cheeyeen Member

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    My view on this.

    A lot of the listed property trusts also have the added advantage of paying tax deferred distributions, and higher yield compare to direct property investment. Most property trusts are geared so in theory the gearing level would not differ that much between direct property and listed property. However, with direct property, we usually start with a large investment portfolio and borrowing (hard to find property that is below 200K, and that means a borrowing of 160K to start with in most of the cases). So any gain will be significant in term of dollar value. It is not often that we can (well.. for someone just starting) borrow that amount in a margin loan. Also we are really at the mercy of the property manager for listed property trust. Like the case of Centro (CER.AX), we might think we were invested in the Australia market but all of a sudden we are now exposed to the US market and currency risk. And the share price has gone down since then. We could argue that in the long run it would be ok, but not everyone is comfortable with it. If we don't like the new direction of the trust and can only sell out, then it would force us to realise the investment and have to pay tax on the CG.
    Despite all these, I sort of lean toward listed trust because of the liquidity, simple process to enter and leave, and not having to worry about tenants and insurance etc.
     
  5. AsxBroker

    AsxBroker Well-Known Member

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  6. crc_error

    crc_error The Rule of 72

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  7. Norak Bastiat

    Norak Bastiat Well-Known Member

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    What kind of funds gear internally? Are you talking about funds like Perpetual Geared Australian Shares Funds? I'm new to geared funds. Because too much gearing can be risky, does the investor get to choose the magnitude to which the fund gears?

    Everyone is telling me to gear into residential property. I think that's the standard path that most are familiar with, but I'm just uncertain. Just because something is popular doesn't mean you should accept it. I think the most difficult part is trying to estimate the true costs because you have to factor in so many things like taxation, fees, etc.
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Most "geared" share funds are relatively conservative with their LVRs - you'll find most of them aim to have their LVR at no more than 50%.

    Here is what the CFS W/S PDS says about gearing:

    It is important that you understand the nature of the risk incurred when investing in an internally geared fund - in some ways there is less risk than gearing a normal fund through an external margin lender (cost of finance is typically lower too), but in other ways there is potentially more risk.

    Note the last paragraph ... this has significant implications if you also gear your investment via a margin loan ... if the fund were to suspend redemption requests and you were to face a margin call - you may find yourself in a very tricky situation (your margin lender doesn't care what the fund does - they just want to reduce their risk ... and will probably expect you to do so from other sources if you cannot sell down your holdings in that fund).