Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 204

Is the property illiquidity premium outdated?

As non-classically trained investment operatives, we have found the basic question ‘Why?’ has served us well. In the past 10 to 15 years, watching market performance, we have constantly questioned why unlisted assets are expected to provide a return premium over their listed peers.

Classical investment theory defines the illiquidity premium as compensation for the loss of control (or liquidity) to exit an investment position at a desired point in time. This is sound logic if markets always trade upon fundamentals. Once behavioural forces come into play, this theory seems to deviate.

Locked funds versus loss of capital

Our research for this article left us thinking that the mortal sin of investing is having investors lose control of their equity in locked funds. While we appreciate the sensitivity of the loss of control, surely losing capital is worse. The distinction between these two will become clearer in a moment.

Historically, unlisted property has provided a return premium of between 100 and 300 basis points (1% to 3%) over listed property as recompense for poor or no liquidity. Property is a good asset class by which to assess the illiquidity premium concept as the listed and unlisted property markets in Australia are deep and generally well researched.

The figure below illustrates the returns from listed property and unlisted (core) property since 2004. This data captures the pre- and post-GFC markets, so represents the impact of the cycle.

Pre-fee cumulative returns, unlisted (core) and listed property (% pa, Jun 2004 = 100)

Source: MSCI

Listed market can suffer from liquidity

Pre-GFC, the listed market was trading at a premium to its unlisted counterpart, clearly at odds with the illiquidity premium, but the listed market was savaged during the GFC.

Herein lies the disconnect: in boom markets, the liquid market appears to trade at a premium to its unlisted counterpart, and then in a market correction, the liquidity sees prices savaged. Peak to trough, listed property lost ~70% of its value whereas unlisted property only declined ~20%.

There is an argument that liquid investors should obtain a premium for the price volatility of their investment. The listed market also took almost 10 years to regain its pre-GFC values whereas the unlisted space took just three years.

Consider our earlier point that losing capital should be the mortal sin of investment, not losing control of the equity. There were a number of unlisted funds that were frozen or locked during the GFC, which saw many investors lose the ability to manage their equity. While this is a less than optimal outcome, freezing these funds may have been the best preservation strategy for the equity at that time. Certainly, these charts indicate that being in an unlisted fund saw ~50% of the equity value preserved in the unlisted sector versus its listed peer. We consider that a reasonable outcome even when factoring in the loss of equity control.

The figure below illustrates year on year returns of listed and unlisted property markets. The listed market shows massive price volatility and ventures into loss territory three times, as opposed to the unlisted sector which has far more stable returns and ventures into loss territory only once.

Pre-Fee rolling annual returns, unlisted (core) and listed property (% pa)

Source: MSCI

If the return expectation for a particular investment is a function of the risk the investor takes on, there is an argument that listed property should provide a return premium to compensate investors for the market risk during irrational periods (both bull and bear markets).

Reconsider the illiquidity premium

We are not pushing one position over the other. Rather we contemplate whether traditional thinking about the illiquidity premium may need to be reconsidered. Periods of exuberance or correction tend to see liquid markets surpassing the fundamental level of the underlying assets, both on the upside and downside.

On this basis, investors need to be clear as to why they are selecting one investment structure over another. Structural differences tied into the same asset class can provide divergent performance and therefore investors need to be clear about their objectives when taking a particular investment position.

Clearly, there are arguments for and against the illiquidity premium. Listed and unlisted markets both have an important role to play in investment portfolios, but the nature of each is shifting. Relying purely on classical investment theory when making asset allocations can be dangerous. As always, drill down into the data and see if the reality matches the theory.

 

Adam Murchie is a Director of Forza Capital Pty Ltd which provides property investments to high net worths, private clients and family offices. This article is general in nature only and does not constitute specific investment advice.

RELATED ARTICLES

Are A-REITs set for a comeback?

Why you can't invest in residential property on the stock exchange

Illiquid assets and long-term investing

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

Shares

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Shares

The ASX is full of old, stodgy, low-growth companies

Eight of the ASX's top 10 stocks are more than a hundred years old, while in the US there's just one. It points to our market being filled with low-growth dinosaurs compared to the US where innovation and renewal rule.

Retirement

Time to review the family home's exemption from Age Pension test

Improving housing mobility in Australia is crucial for enhancing both individual well-being and the economy. Potential reforms include ensuring greater rental security and incentivising downsizing among older homeowners.

Superannuation

Death benefits from super don't need to be this complicated

This may surprise you, but a person's super balance does not automatically form part of their estate. A simple change could bring greater certainty to Australians, quicker payouts for families, and lower super fees.

Economy

The RBA deserves kudos for a job well done

Over the past few years, the Reserve Bank of Australia has been subjected to a blizzard of criticism. Yet, despite its flaws, it may just have engineered that rarest of beasts: the fabled soft economic landing.

Investing

Asia deserves a closer look from investors

As part of their global exposure, Australian investors typically allocate most to Developed Markets equities, and a smaller portion to Emerging Markets. This looks at the latter position and whether there might be a better way.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.