Gaining Liquidity from Illiquid Property Trusts

Property trusts, often referred to as Real Estate Investment Trusts (REITs), pool funds from multiple investors to invest in real estate assets. These funds can vary in strategy, ranging from diversified portfolio funds to funds that focus on a specific asset class such as residential buildings or commercial properties like shopping malls or office spaces.

Investing in Australian property trusts has long been considered a stable, long-term strategy. But like every investment opportunity, it doesn’t come without its caveats. One of the most discussed, yet often misunderstood, aspects of investing in these real estate trusts is the question of liquidity, namely one’s ability to quickly and easily convert units into cash.

At its core, illiquidity refers to the difficulty in quickly converting assets into cash without a substantial change (diminution) in value. Think of it like trying to sell a concert ticket last minute; the closer to the event, the harder it might be to get your money’s worth.

A feature of many property trusts is the mechanism of redemptions that allows investors to convert their units in the trust back to cash. Typically, an investor will fill out a redemption form and lodge it with the Fund Manager who in turn will draw upon the cash reserves of the Fund to buy back (redeem) the investor’s units. However, the illiquid nature of real estate can pose a number of challenges, especially where the redemption amount exceeds the cash reserves available to the Manager. In these circumstances, the Manager will typically announce a redemption deferral or freeze for a fixed period, or an indefinite period of time. Where this occurs, investors are caught in an unfortunate predicament, especially if they have an urgent need for cash.

While property trusts offer diversification and the potential for attractive, reliable returns, the redemption process can be complex and protracted due to the illiquid nature of the underlying real estate assets.

Before deciding to invest Investors should carefully read and understand the redemption policies of any property trust they invest in and in particular be aware of the potential risks and delays involved.

Why Australian Property Trusts and Illiquidity Go Hand in Hand

Nature of the Asset: Real estate, no matter where it is located, is inherently not as liquid as, say, shares or bonds. Selling a property, particularly a commercial one, is not an overnight affair. It can take many months of marketing just to find a willing buyer at the price sought.

Market Mood Swings: The wider economic environment plays a very big role. For instance, during the Global Financial Crisis, many investors were taken aback by how challenging it was to redeem their units in Australian property trusts. The market simply did not have enough buyers. As they say, when it rains it pours, and so when the market generally, or the REIT market in particular, takes a turn for the worse it is not uncommon to see a rush for the door by investors with the inevitable result that redemptions are frozen.

Redemption Restrictions: Some trusts include specific clauses that prevent investors from withdrawing their money immediately. It’s a safety net for the trust but can feel like a trap for investors.

Implications of This Illiquidity

Delayed Access to Funds: Imagine needing cash urgently but being told you can only get it in a few months at best. That is the reality for many unit holders during a liquidity crunch.

Trust Performance: If a trust has to sell properties in a hurry to meet redemption requests, it might not get the best price. This might materially reduce the amount of cash available to meet redemptions and in some circumstances may even trigger insolvency.

Pricing Ambiguities: In a market downturn, the reported net asset value (NAV) of a trust may not accurately reflect the real market value of its properties, especially where the Manager is a forced seller.

PrimaryMarkets Tackles Illiquidity

PrimaryMarkets has recently announced that it has signed an agreement to provide a Trading Hub to the Dexus Wholesale Australian Property Fund (DWAPF).

DWAPF is a $2 billion open-ended fund that aims to provide stable returns and long-term capital growth through investment in a diverse portfolio of quality Australian office, retail and industrial properties.

This is a significant milestone for PrimaryMarkets and a first of its kind, offering an alternative liquidity solution to unit holders in DWAPF. The Trading Hub will be provided through the PrimaryMarkets Platform and will enable unit holders to sell their DWAPF units to accredited investors, financial advisors and institutional investors registered on the PrimaryMarkets Platform.

The Trading Hub Platform that PrimaryMarkets has built and operates provides an added exit strategy that was previously unavailable to DWAPF unitholders. The process is transparent and secure.

With access to over 100,000 potential buyers, PrimaryMarkets stands at the forefront of the financial revolution, exemplifying how innovation can transform the way we invest, trade and raise capital.

By breaking down traditional barriers, providing liquidity solutions and promoting transparency, PrimaryMarkets has become a driving force in the modern financial landscape. As the Platform continues to grow and evolve, it promises to unlock even more opportunities for investors and companies, shaping the future of finance for the better.