Real estate investors who ignore commercial real estate are missing out on the attractions of a large part of Australia’s property market, including higher rental yields than are available from residential property.
This makes it especially attractive for people who live off investment income, such as retirees. Indeed, my best-performing investment for the year to September was the Charter Hall Direct Office Fund, which returned 21.3%, including a dividend yield of 6.7%. This fund is open to new investors.
Overall the unlisted sector produced total returns of 12.3% in the year to September 2017 as measured by the Mercer/IPD Australian Property Fund Index. Three-year returns were 11.8%pa and five-year returns 10.6%pa.
Many shy away from commercial property because they think it’s just too much hard work and too expensive. But there are ways to get into the sector without buying your own office or shop.
One of the easiest ways is to buy an Australian real estate investment trust (A-REIT) or a real estate exchange traded fund (ETF) on the ASX, where you only have to outlay a minimum of $500.
But the big problem is that property investments listed on the ASX are affected by sharemarket volatility and are not direct real estate investments.
You can get direct exposure by investing in unlisted funds. You will not find this as easy as it is with A-REITs, which are covered by many analysts, and you’ll also have to outlay more money, ranging from $10,000 to $50,000.
Good places to find out about unlisted funds include Core Property Research (coreprop.com.au), a relatively new company providing research on both listed and unlisted funds. Dinesh Pillutla, who was previously managing director of Property Investment Research (PIR), is MD of Core. He has over 20 years’ experience across the property and IT sector.
At the time of writing Core had reports and recommendations on four unlisted funds open to investors.
Three had “recommended” ratings and one – the GDI No. 43 Property Trust, which invests in a retail site leased to IKEA in Perth with 8.0%-plus distributions and development potential – is rated “highly recommended”. Minimum investment is $50,000.
Unlisted trusts don’t enjoy the liquidity of A-REITs and property ETFs and your money can be tied up for several years. This makes it even more imperative that you do your due diligence:
• Check out the track record of the fund manager and stick to those with a sound history.
• Know the redemption policy of each fund. With some, such as closed syndicates, you will be locked in for several years.
• Understand that funds investing in a single asset carry more risk than those investing in a diversified portfolio of properties.
• Check the gearing levels are not uncomfortably high for you.
• If income is important, choose funds with regular distributions.
Crowdfunding platforms such as DomaCom allow investors to invest in specific properties, including commercial.
DomaCom has developed a retail managed fund combined with crowdfunding technology which allows investors to invest upwards of $2500 in specific commercial and residential properties. At the time of writing commercial property opportunities included the Federal Hotel in Deniliquin, a refurbishment project and a bioHub development in Casino.
And, of course, you can buy an office, shop or industrial unit outright, often for far less than the cost of a residential property.
You need to engage a good lawyer familiar with commercial property leases. Finding and keeping tenants who can pay the rent is the main hurdle investors have to overcome with these properties. A good place to start looking for investments is realcommercial.com.au.