How do my returns from a property fund work?
These funds are chosen predominantly by investors for their income distributions (or yield) which are in most cases higher than the interest payments made from bank deposit or fixed interest (bond) investments. Yield investors are generally those who are seeking to access income from investments to fund existing needs rather than seeking capital growth over the long term. Typically yield investors might include retirees who are funding their pension, Self Managed Super Funds or SMSF’s seeking income investments to fund retirement benefits for members or investors who have a preference for cash distributions.
Income distributions given to investors from a property fund are generated from the rent receipts collected from the tenants occupying the properties held by the fund. In this sense the Fund Manager also acts as the landlord.
Once the property rent is collected, the fund manager will make the necessary payments to service providers to the fund and any interest payments required under its debt facility. It will also make a deduction for the fees required for managing the fund itself (these costs and fees will be set out in the Product Disclosure Statement for the fund). The net cash proceeds are then shared out amongst the investors or unitholders of the fund in proportion to the units they own. Given that the net income from month to month should not vary significantly, the aim is to deliver steady and reliable income distributions to investors.
Generally unlisted property funds will pay distributions either on a quarterly or monthly basis.
As investors are holding the “bricks and mortar” through the fund there is also the potential for capital appreciation in line with movement in the value of the properties. Just as important however is the risk that the value of the properties may go down, leading to a capital loss.