Listed Property Funds NZ
A listed property fund owns a portfolio of commercial buildings and trades on the NZX like a share. It solves the two largest problems with owning property directly or through a syndicate: you get many buildings instead of one, and you can sell on any trading day.
It introduces one feature that confuses people, which is that the market price and the value of the underlying property are two different numbers and frequently disagree.
The three things to remember
You get diversification and liquidity a syndicate cannot offer. Most are PIEs, so tax is capped at 28 percent. And the price can sit at a discount or premium to asset value.
Against a syndicate
| Listed property fund | Property syndicate | |
|---|---|---|
| Number of buildings | A portfolio | One |
| Selling | Any trading day, at market | Often no exit at all |
| Price transparency | Continuous and public | A periodic valuation |
| Minimum investment | The price of one share | Typically tens of thousands |
| Daily price movement | Yes, and it can be volatile | No visible movement |
| Tax treatment | Usually PIE, capped at 28 percent | Depends on structure |
The last two rows contain a genuine trade rather than an advantage. A syndicate's value moves just as much as a listed fund's; you simply do not see it, because nobody prices it daily. Some investors prefer not seeing it, which is a real psychological benefit and not an economic one.
It is common to hear that syndicates are less volatile than listed property. They are less visibly volatile, which is different. The buildings in both are exposed to the same tenants, the same interest rates and the same market. One is marked to market continuously and the other is marked once a year by a valuer. Choosing an asset because its losses are less legible is a preference worth recognising for what it is.
The discount to net asset value
A fund publishes a net tangible asset figure per share, being the valuation of its properties less its debt, divided by the shares on issue. The share price is whatever the market pays, and the two rarely match.
That sounds unambiguously good and is not. A persistent discount usually reflects something the market believes: that the valuations are optimistic, that the gearing is uncomfortable, that the fees are high, or that the sector faces difficulty. Sometimes the market is wrong and the discount is an opportunity. Sometimes the valuer is wrong and the discount is a forecast.
Treat a large discount as a question rather than a signal. What is the gearing? When were the properties last independently valued and on what capitalisation rate? Is the manager internal or external, and what does it charge? Are leases expiring in bulk? The answers usually explain the discount, and occasionally they do not, which is the interesting case.
PIE tax, briefly
Most listed property funds here are portfolio investment entities. Income is taxed at your prescribed investor rate, capped at 28 percent, which is below the top personal rate of 39 percent. For a higher earner that is a genuine advantage over holding property directly, and it applies automatically once your correct rate is supplied.
Supplying the wrong rate is a common and avoidable error. Too low and you owe the difference. Too high and you have overpaid, and depending on the entity you may not get it back easily. Check the rate you have on file whenever your income changes materially.
What to look at in a specific fund
Where a fund is managed by an external company paid a percentage of assets under management, that manager is rewarded for the fund being larger, which is not always the same as the fund being better. Acquisitions that increase the fee base while diluting returns are the specific concern. Internally managed funds do not have this conflict, which is one reason the market often prices them differently.
Where listed property fits
It behaves partly like property and partly like a share. Over long periods it tracks the property market and the rental income underneath it. Over short periods it moves with the sharemarket and with interest rates, sometimes sharply, because it is priced continuously by people reacting to both.
Interest rate sensitivity is worth understanding specifically. Property funds are geared and pay an income, so they are compared to bonds by many investors. When rates rise, borrowing costs rise and the income looks less attractive against alternatives, and prices commonly fall on both counts at once.
A note on the income
Distributions from listed property funds are typically higher than dividends from the broader sharemarket, which is why they appeal to income investors. Check whether distributions are covered by operating earnings rather than funded partly from capital or from asset sales, because an uncovered distribution is not sustainable however attractive it looks in a yield table.
What this guide does not cover
Individual funds differ in gearing, sector, management structure and fee basis, and this guide describes none of them. Overseas listed property carries foreign investment fund considerations not covered here. Prescribed investor rates depend on your own income and should be confirmed with Inland Revenue or your accountant. This is general information rather than financial advice.
Related guides and tools
- Commercial property syndicates guide, for the illiquid version of the same asset class.
- KiwiSaver fees guide, for how the PIE tax rules work in the scheme you already have.
- Commercial leases guide, for the lease income underneath the fund.
- Term deposits guide, for the income comparison usually drawn.
Test Your Knowledge
Ten questions on listed property, PIE tax and net asset value.
Sources: New Zealand's portfolio investment entity tax rules, under which a listed PIE's income is taxed at prescribed investor rates capped at 28 percent; and NZX listing requirements. Individual funds differ in gearing, sector, management structure and fee basis, so read the specific fund's disclosures. This is general information rather than financial advice.
Related tools and guides
- Index fund projection calculator: a listed fund holding projected over time.
- Sector exposure calculator: what a property fund adds to your sector mix.