Individual investors who have built a nest egg often overlook an investment option which forms a cornerstone of all major institutional investors who manage risk for a living (i.e. big super funds, the Future Fund etc.), namely, investment grade commercial property.
The average individual investor is quite likely to have exposure to a residential investment property and maybe a property involved in a business they owned.
Generally, these investors are ‘short’ on investment grade commercial property, unless they have invested in Australian or international REITs (Real Estate Investment Trusts) or Direct Property funds (aka ‘unlisted property funds’), all of which provide a pathway to partial ownership of this cornerstone asset class.
The reason why average investors may not have exposure to investment grade property is due to its scale, affordability and that it requires a great deal of active management.
Investors should not fear commercial property as a complex investment option. They will already have an affinity with commercial property as most have worked in offices, shop regularly in retail centres and increasingly online shopping, where those items are delivered directly from industrial warehouses.
Commercial property is simply earning rent from tenants for their use of the property which is then paid to the owner (the investor).
The big, professional and risk averse investors usually allocate between 8 and 20 per cent of their entire portfolio to commercial property. Following this lead is an excellent way for individual investors to manage risk in retirement.
The critical differences between REITs and direct property trusts are liquidity and volatility. REITs have significantly higher liquidity and volatility than direct property funds.
Choose the characteristics with which you are most comfortable - or a mix of both. Most importantly, choose a highly reputable manger with a track record of success and one who practices conservative gearing for their investment funds. As a rule no more than 50 per cent, and ideally a little lower.
How to gain exposure to investment-grade commercial property
To achieve the full benefits of commercial property, you need the right investment vehicle. A common avenue to quality property exposure is by investing through a specialist commercial property fund manager.
Managers like Charter Hall invest in institutional grade office, industrial and retail property assets and have established funds with high quality tenants and long leases providing secure income profiles for investors. Investors can expect predicable income in the range of 5-7 per cent p.a. plus some capital gain, making the projected total return of around 9-10 per cent p.a. or more over the life of the investment.
What the commercial property market will look like in 2018
In terms of the big picture it’s generally agreed among industry professionals that commercial property markets will do even better 2018 than 2017 and we concur.
The strength and outlook of commercial property markets in Australia is underwritten by our strong population growth, one of the strongest in the OECD, and Australia’s world record economic growth performance of 104 quarters without a recession.
The biggest balancing factor in this positive picture is an extended period of low wages growth since the GFC.
The bottom line however is commercial office buildings in eastern seaboard capitals, led by Sydney and Melbourne and Brisbane have been, and continue to, be very attractive places to invest.
We believe the industrial property market is another avenue of good returns going forward. The ‘Amazon’ or e-commerce effect’ has seen strong and increasing growth in this sector. Seventy per cent of demand over the last few years in the industrial sector, which also includes factories, food processing and traditional warehouses, is related to logistics.
In summary, follow the lead of big super funds, which generally hold between 8 per cent and 20 per cent of assets in investment grade commercial property. We believe total returns of around 10 per cent p.a. can be realised by investing in funds that feature the best of office, industrial and retail property.
Steven Bennett is head of direct property at Charter Hall.