By Joe Christie, Executive Director, Capital Property Funds
At the same time, they must consider factors such as volatility, liquidity, and potential returns. Understanding how these elements interact—especially the role liquidity plays in driving volatility—can be helpful when selecting suitable investments, including property debt funds (also referred to as real estate credit funds).
A property debt fund is an investment vehicle that pools capital from investors to provide loans. The loans are backed by tangible, providing a layer of security for the lender (or property debt fund) because the property can be sold if the borrower defaults on the loan. Property debt funds generate returns through the interest paid on the loans by the borrower.
Volatility: A Key Concern for Retirees
Volatility refers to how much an investment’s value can fluctuate in a given period. In retirement, high volatility may be a concern because retirees may rely on steady returns to support their day-to-day needs. Sudden drops in asset value could undermine this stability, especially if there is not enough time for the market to recover before withdrawals are needed.
Listed investments, such as those traded on the stock exchange, are typically more volatile than unlisted investments. The primary reason for higher levels of volatility is liquidity. Liquidity refers to how quickly an investment can be converted into cash.
On the other hand, unlisted investments like property debt funds do not trade on the stock exchange and thus are not subject to the same degree of liquidity related volatility. Since investors cannot easily trade these assets, their value is less influenced by short-term market sentiment. This can result in more stable pricing and potentially lower volatility, when compared to listed investments, which may appeal to retirees seeking to preserve their capital.
Liquidity: A Double-Edged Sword
Liquidity refers to how quickly an asset can be converted into cash. With listed investments, investors can generally convert their investments into cash within a few business days. This high level of liquidity is attractive to some investors, but it also makes listed investments more vulnerable to price movements.
Property debt funds, by contrast, tend to have lower liquidity. They are secured by property, which cannot be readily converted to cash. Investors often need to commit their capital for a defined period before they can redeem their investment. This reduced liquidity means these investments are not subject to daily price movements, which means they are more stable than assets traded on the stock market.
The Liquidity Premium
We have discussed liquidity and its impact on volatility, it is worth mentioning that unlisted investments may offer higher income returns than more liquid investments. This is often referred to as the “liquidity premium,” where investors are rewarded for committing their funds for a longer period.
Retirees who are comfortable with having less frequent access to their capital could find this trade-off worthwhile. By accepting a longer investment term, they may potentially earn higher income than they would with more liquid, listed investments combined with lower volatility on their invested capital. Conversely, retirees who prefer more timely access to their funds might opt for listed investments, even though they could face higher volatility and potentially lower income returns.
Key Takeaways for Retirees
1. Volatility and Liquidity: Listed investments can be more volatile than unlisted investments due to their liquidity. In contrast, property debt funds are not traded on an exchange, which tends to result in lower volatility and a more consistent capital value.
2. Capital Preservation: Retirees often aim to reduce dramatic swings in their portfolio value. Property debt funds may offer a measure of stability by avoiding daily market fluctuations.
3. Long-Term Commitment: Less-liquid investments might suit retirees who do not need immediate access to their funds.
4. Balancing Needs: Ultimately, the choice between listed and unlisted investments depends on a retiree’s priorities. If more timely access to cash is essential, listed assets might be preferable—even if volatility is higher. If preserving capital and higher income returns are important, property debt funds may be worth exploring.
By recognising how liquidity drives volatility in listed investments, retirees can better evaluate whether a higher or lower level of liquidity suits their financial goals and help build a retirement portfolio that aligns with their risk tolerance and need for steady, long-term income.
At Capital Property Funds, we specialise in offering Real Estate Credit Funds that provide our investors with access to stable, income-generating real estate loans. Our funds are designed with the needs of our investors in mind, focusing on capital preservation and delivering consistent income returns. By pooling resources from multiple investors, we’re able to offer larger loans to high-quality real estate projects, providing a level of diversification and risk management that individual investors may find difficult to achieve.
Our Real Estate Credit Funds are an excellent option for those looking to earn higher returns while maintaining a focus on capital preservation. We carefully select the projects we invest in, ensuring that each loan is secured by valuable real estate assets.
If you’re interested in learning more about how real estate credit funds can fit into your investment portfolio, talk to our team.
Disclaimer: Past performance is not indicative of future performance. The distributions and investment returns depend on the performance of the underlying investments. Information contained within this article does not constitute financial advice, nor is it a personal recommendation. Capital Property Funds is not authorised or qualified to provide financial advice or to make an investment recommendation. Information contained within this article is general in nature and has been prepared without regard to the individual objectives, financial situation, or requirements of any person. Prospective investors should seek personal financial and legal advice before deciding to invest.
More information:
