Investors who have no commercial property in their portfolios are missing out.
There’s a lot more diversity in the commercial sector compared with residential – think office towers, retail centres, huge warehouses, tourist accommodation and education facilities.
And this sector has a lot going for it when you compare it with other types of assets, including houses and apartments.
Of course, most of us can’t buy multimillion-dollar property assets outright but we can access direct commercial real estate assets with as little as $5000 through unlisted funds, though most require around $20,000.
Sure, you can buy into the real estate sector on the ASX with as little as $500 but the problem with investing in Australian real estate investment trusts (AREITs) is they’re not pure property plays and they are subject to the volatility associated with being listed.
And it’s much the same for property security funds, which mainly invest in AREITs.
It’s not as easy to invest direct, it’s less liquid and you do need more cash upfront. But it has the big advantage of giving you direct access to commercial property, adding to the diversity of your portfolio.
Investing in this sector can provide an attractive income return relative to cash and fixed interest, contributing to the total income generated by your portfolio.
This is particularly useful for those who are retired or partly retired and rely on investment income.
The tax-deferred component of distributions you receive from direct property can provide tax benefits if the investment is held before, and sold in, the pension stage. And you can also expect capital growth from these investments.
For example, my investment in the Charter Hall Direct Office Fund returned a total of 13.4% in the year to December 2018: 5.6% income, paid quarterly, and 7.8% capital growth.
Commercial real estate compares favourably with residential property. The cash yield is around double: 5%-7% compared with 2%-4% from houses and apartments. The leases are also longer, normally around three to five years compared with six months to a year for residential.
The tenants are usually businesses and government departments, not individuals, and they mainly pay outgoings, such as water and rates, which doesn’t happen with residential tenants. Most commercial leases also have regular rent reviews built into them.
One drawback is there’s not as much choice among unlisted funds and syndicates as there are among A-REITs, property security funds and real estate exchange traded funds (ETFs).
Charter Hall Direct, part of the Charter Hall Group, which has over $26 billion in funds under management in both listed and unlisted funds, is a major source. It bills itself as Australia’s leading direct property fund manager, owning and managing assets in the office, retail and industrial property sectors Australia wide.
It has four funds open: Direct Office (mentioned above), Direct Industrial Fund No. 4, Direct Diversified Consumer Staples and Direct PFA, all of which offer investors a slice of a portfolio of investment-grade properties.
The minimum investment in these funds is $20,000. They returned 13.4%, 10.7%, 8.5% and 10.8% respectively in the 12 months to December 2018 and Direct Office, which has been open the longest, returned 15.6%pa in the three years to December 2018.
One-year income returns were 5.6%, 6%, 6.6% and 6.7% respectively. For more information on these funds, including independent analyst reports and how to invest in them, go to charterhall.com.au.
Core Property Research is also a good place to search for unlisted property funds. At the time of writing the Core site had research on 10 open unlisted trusts with minimum investments ranging from $5000 to $250,000, some offering access to multi-property portfolios and others to single assets.
You can also buy your own commercial property outright, with office, retail and warehouse units available for no more than you might pay for a house or apartment.
If you want to explore this option, the websites realcommercial.com.au, commercialrealestate.com.au and commercialview.com.au are good places to start.
If you do go this route, rather than buying into a fund, you won’t get the same level of diversity for your outlay and normally you will have to take on a big mortgage.
And you won’t have access to the expert management that many funds offer.