Unlisted property trusts are being peddled to professionals as attractive investments when nothing could be further from the truth. Shiny new buildings will if completed come into a market where:-
- Empty shops left by store closures and closures which are yet to occur but inevitable with retail collapses occurring will increase the power of continually retailers to extract better rental deals from their landlords when negotiating renewal options. The forthcoming closure of a number of Target stores coupled with about 70% of Premier Investments stores which owns several retail chains including Peter Alexander, Just Jeans and Smiggle, are in rental holdovers or have leases expiring in 2020. There was also last week’s announcement that women’s fashion retailer City Chic would close 14 of its 92 stores across Australia and New Zealand. These are all pointing in a similar direction. There will be a huge amount of spare space in major shopping centres and rents will fall.
- There is likely to be worse to come once temporary JobKeeper assistance is phased out and short term restrictions on business liquidations pass.
This has all happened before, notably in the early 1990’s when a combination of over building of office space and the “recession we had to have” resulted in a massive over supply in commercial office space and a vast number of business liquidations. Some buildings in Melbourne lay vacant or partially vacant for years. Lots of headline rents were misleading as there were often extensive rent free periods to new tenants or other inducements such as landlord paying for fit outs or landlords contributing towards the pay out of existing leases in order to induce tenants to move to their new building. All of this meant that in reality the headline rents and the actual net income were vastly different.
It is likely that investors in unlisted property trusts owning yet to be completed new buildings will find out that the net rental income turns out to be far less than anticipated and that as a result when the building is re-valued every two or three years, the value will fall substantially. Worse still there will not be a market to on-sell your investment. This is unlike a listed property trust sold on the stock market where prices adjust quickly to match buyers and sellers.
Our verdict – avoid unlisted property trusts; particularly at a time when the demand for both retail and office space will be in substantial decline.