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Bricks and stones investors know, but commercial can aid in diversity

  • May 08 2018
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Bricks and stones investors know, but commercial can aid in diversity

By Lucy Dean
May 08 2018

Investors may believe a commercial property investment is unattainable, but according to an expert in the space, not only is it attainable, it also helps portfolios diversify.

Steven Bennett

Bricks and stones investors know, but commercial can aid in diversity

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  • May 08 2018
  • Share

Investors may believe a commercial property investment is unattainable, but according to an expert in the space, not only is it attainable, it also helps portfolios diversify.

Steven Bennett

Speaking to the Nest Egg podcast team, head of direct property at Charter Hall Steven Bennett said many people think commercial property investing is limited to multi-story office blocks or new projects.

However, he said it’s much broader than that and said retail investor interest in the space is growing.

He also spoke to the team about:

· Why investing in commercial property is more attainable than you might think;
· The importance of ‘getting behind the data’ to understand the different commercial markets; and
· The diversification benefits investing in commercial property brings.


Thanks Steven for sharing your insights with the Nest Egg podcast team!

You can stay up-to-date with what Steven Bennett and Charter Hall are up to here.

Have an investment story to share? Get in touch at This email address is being protected from spambots. You need JavaScript enabled to view it. and you might get featured on the next episode.



David Stratford: G'day and welcome to the Nest Egg podcast. David here. I'm joined today with Steven Bennett. Steven's one of our friends at Nest Egg. You've probably seen his face around on Investment Insights a few times, but he's been creating a lot of interesting pieces for us to read over the coming months, so we thought, why not. Let's get him in.
Steven is actually the Head of Direct Property for Charter Hall. Steven, with further ado, welcome to the show.

Steven Bennett: Thank you, David. I'm glad to be here.

David: I think the main reason that we brought you in, Steven, is you're our guy for looking at the commercial property sector, especially with investors these days, which, you know, they tend to be very tied up in residential property. And that's not through choice. I think it's just through comfort or having that kind of knowledge around resi. Resi is very much a tangible thing that they can live in or have a tenant live in or something like that.
But, talking about commercial, that's something which I think people could have an opportunity to get involved in. But I'd thought I'd get you to sort of give us an idea as to who you are at Charter Hall and what you've been doing there for the last seven years.

Steven: Sure. Thanks, David. Look, I head up the direct property business at Charter Hall. That's a very interesting business. I've been there for, as you said, over seven years now. And, look, what we do is we provide commercial property opportunities to self-managed super funds, high-net-worth investors, basically your mum and dad investors. So, David, your friends, your family can actually invest into our products. And that's probably also a good introduction.
What do I mean by commercial property? People often think, okay, that's just your big office, shiny towers. But it's definitely more than that. It includes things like industrial warehouses, distribution centres, your retail shopping centres that you go to on a daily basis. These things are all captured in that commercial property space, and that's what we do at Charter Hall.

David: It's one of those amazing things where, commercial really opens up to such a broad range of different opportunities within property, and property is, you know, people think bricks and mortar. It's very simple. But when you look at a commercial background, you are talking about your shop fronts. You're talking about particular office buildings or new builds or projects which are moreover so a lot more lucrative or a higher value for people to either create or invest in or get involved in.
I think the biggest thing for me, and I think a lot of listeners out there, is there's a few opportunities for people to look at commercial property, but what would you say are the kind of more interesting points to get involved? You know, why should investors look at this kind of sector.

Steven: Sure. And, David, I think you hit the nail on the head there. One of the things that holds back some investors from going into commercial property is that they think it's not attainable for them. A lot of the popularity with residential, yes, you can feel. You touch it. But you can buy one. It's an amount that's achievable for people. If you look at a big office tower that's a hundred million dollars, how do you get access to that?

So what we do is we just buy that office tower and we pool, in many cases, a couple of thousand investors into that. And what are the different characteristics of commercial property versus, say, the residential? Look, commercial property is really about an income. You can get a very good strong income yield from commercial property, six to seven percent, which is appealing. Particularly, we still are in this low interest rate environment.
And, look, there are a number of things people need to consider because not all commercial property's the same, just like not all residential property's the same.

David: That's interesting, I think, with the listeners out there. Income is a huge part of their portfolio for an investor over at Nest Egg. You know, looking into their retirement, is commercial property ... With residential, just off my experience, it ebbs and flows and it moves quite fluid to where investors want to go. Commercial, is it more, would you say it's stable? Would you say it's in an upward trajectory at the moment? I'm not looking to go into the market itself, but maybe a few trends that you've seen in that space would be quite interesting to know.

Steven: Sure. Look, it's important to not think of commercial property as one market. That's the first thing I'd always encourage people to do. A good manager will do their research. So, the Sydney office market is performing extremely strongly at the moment. The industrial markets throughout Australia are generally performing well. So you can't just characterise and say, I'm going into commercial property and buy anything and expect similar returns. And that's what you asked before around what a good manager does. They have that research capacity, capability, and they do that work for the investors, and they need to put forward a compelling investment thesis on why they've gone into a Sydney office tower or a Melbourne office tower because the income stream that comes out of them, it is different to residential, but they're not the same.
You need longterm leases. Who's paying the rent? You got to get behind the data.

David: Absolutely. And I think that's a huge point. The biggest focal point for our listeners here today as well as looking at commercial, or at least having that discussion on it, it's interesting to know who the people that are working behind the scenes in the company ... I always call them the weathermen, weatherman or the weatherwomen, or whoever they are, but there's a team behind every successful fund manager that are doing all the calculations, the real nuts and bolts behind it to make sure that they're picking the right properties.

Is that something which you get involved in, or do you sort of have the conversation with the investors?

Steven: Look, it's something I get asked a lot. What do you do, Steven, at Charter Hall? I'm in a fortunate position. I head up a very capable and strong team, and it wouldn't be possible to invest into commercial property if you're trying to do it yourself. I rely on experts in Treasury to source the debt at the best rate, tax advice on depreciation benefits and tax deferred for our investors, research, which I touched on before, directing me and giving me that background information. But, probably, most importantly with property, you need to realise that anyone can buy property, in commercial property. It just means you paid more than the next person.
But to do property well, you need to identify not just the right opportunities to go into, but you need to manage these things. At Charter Hall, we have people located on the ground with all the assets because property is a relationship game.

David: Yeah, absolutely.

Steven: You need to know your tenants really well, the agents, and without having that background, it'd be very tough to do.

David: They always say, with an investor, a lot of it is psychological as well, but it's a lot about philosophy. For me, when I look at opportunities, I'm reading a lot of articles every day. I'm getting involved in this industry quite a lot on many different levels, but at the same time, I always look out for partners I work with or projects I can get involved in which really do sort of breed that business philosophy out there in the industry. Because it's very easy to look at a property and go, oh, that looks like a great building to get invested in.

Steven: Yeah.

David: But the most important thing is, well, actually, who are the brains behind it. Who's actually managing it? Who's picked that building and can show you, or at least give you an idea, that there's some value there? And I think going into very lightly around the property market and having a look at Australia, we're booming. Like, this market is pretty ... I was trying to find the best word. It's strong. But at the same time, is it overvalued? Maybe a bit. I think with commercial, I think there's a lot more opportunity for growth and growth in that space because it's not as heavily got, you know, the magnifying glass isn't as heavily on the commercial and industrial areas as much as resi.
Are you seeing that investors are sort of increasing that conversation with you?

Steven: Look, I think commercial property has been very popular and continues to be with your large institutional investors, so your Australian super funds, your off-shore pension funds, your future funds. Those kind of big investors have always had an eye to commercial property. But, David, you're right. The retail investors in Australia traditionally haven't been focused so much on that, and that is changing. Without getting too much into the detail of differences between commercial and residential, but you have to consider the income. If you're pulling out three percent income on a residential property, after all your costs to maintain it, your agent's fees, it's probably not a bad result in a market like Sydney, for example.
Commercial property, after all costs for a very high quality asset, whether it's in office or industrial, should give you six to seven percent, and that's very attractive. But, they're not all the same. The philosophy, you asked about before. And, look, it's important here. Not one philosophy's right with commercial property, but it's very important that you're very clear with your investors on what you are going to do and what the product that they're looking at is going to do.
So, look, we think commercial property gives investors that income. And we're very focused on that, and we focus on very longterm leases, so eight, nine, 10 years, to very high-quality tenant covenants. So, tenant covenants, just a fancy way of saying, who's paying the rent?

David: Yeah, yeah, for sure.

Steven: We have Australian governments entered in there as tenants. They're fantastic. They'll continue to pay the rent.

David: Yeah, yeah, they're always going to be there.

Steven: ...worked out. And someone actually asked me the other day, "Well, Steven, you got a fund here. Seventy percent of the income is from Australian government entities. What happened if they stop paying the rent?" I said, "Oh, that's a good question, but I would catch that and say, if the Australian government stops paying the rent, I suspect how your commercial property fund's doing will be the least of your concerns, because there's a whole lot of other issues which would be much more concerning.

David: Yeah, yeah. A hundred percent. And that's a good point. I think the tenants that are in there, you know, aren't moving to a house in Sydney. This is obviously residential, but you may change your mind a year or two later. You may need a bigger place or a smaller place, or you might start having a family, or anything like that. I think with commercial, you're kind of gearing yourself for potentially a longer, more sustainable business. And I think that's something which, do you look at properties across the whole of Australia, or do you focus more in particular, you know, Sydney, Melbourne types? You know, where are the hot spots at the moment for you?

Steven: Look, I think you need to realise, with property, you need to have, as I said earlier, people on the ground located. So, we consider ... I'm very fortunate that Charter Hall has staff throughout Australia. So leasing staff, asset managers, transaction team members, so that mean we can look at everything. And often it's not just about how that particular sector's performing, but what are the prices for those assets. So, generally, at the moment, Sydney, Melbourne office markets performing extremely strongly. Brisbane has definitely come off the bottom. The rents are increasing. The vacancy rates, trending down. Perth probably has a bit longer to go.

David: Perth's been in that position for a while, hasn't it?

Steven: Yeah, look, that's not surprisingly when you consider what's happened to the mining sector over there for the last few years. If you look at industrial, or logistics is another way to think of it, that's a real boom area. I think off-shore investors have probably picked up on this trend a little bit quicker than some of the Australian investors, and that's because they're further down the field of e-commerce. People buying things online, delivering them. And when you think about e-commerce, well, what do you need? Okay. Maybe less bricks and mortar, but you need more warehousing. You need more depots to ship the goods. And that's a trend that's going to continue to play out over the longterm here in Australia, and you're already seeing extremely high demand for Sydney and Melbourne industrial assets, also Brisbane.
But that trend will happen across Australia.

David: It's great that you've highlighted that, actually, because that's such an important point when you look at a property and you think, well, what's going on around it. What's actually happening in that space? And you just labelled off a couple of different things that are going into particular areas. I know we briefly touched on Perth, but Perth, just from my experience, is a different world in its own because ... I think someone told me a story once, one of my colleagues, I think, a property or at least a commercial property over there sometimes can be a lower vacancy rate, which can be a struggle for investors if there's no one there.

But I think there was one time where the tenant was like, well, you can give me two years rent for free, and I'll stay in that building. And then after that, they were willing to pay the rent. So there's room to grow there. It's not now by the sounds of it, but I think people could look and educate themselves towards the the future.

Steven: Absolutely. I wouldn't rule out Perth, and we're not ruling out Perth.

David: No.

Steven: We're still looking at assets that have the right characteristics, the longterm leases, quality assets. So, it just means you got to be more discerning in what you buy. Perth, at the moment, has a high vacancy rate, around 20 per cent. It's off its highest, and it's moving in the right direction, which is great, but you need to pick the buildings that tenants want to be in in the longterm because they've got choice. You need to do that Australia-wide because you want properties that go through investment cycles, but when you do have a high vacancy rate in that market in the moment, it just means you need to be more critical in your assessment.
Look, we're looking at a few assets, very high quality assets in Perth, and if we can get them for the right price for our investors, then that will be a great addition to the portfolio.

David: Absolutely. It's good as well because I'm saying these things, and you have a good idea in terms of what is to come or what is going on at the moment, which is interesting. You know, looking at a property fund manager in that sense, and how do you navigate? How would an investor navigate, you know, who's really the right one for them and what sort of benefits would they be looking for to find that fund manager?

Steven: Yeah, look, like property, every asset is very different and each manager is very different. You really need to understand their philosophy. So, what are they targeting when they're considering property? So you might find a manager who's looking for very short-term capital growth, very high returns, but with that comes some very high risk. At Charter Hall, what we focus on is income. We know the majority of our investors are invested for that good, steady income stream, and so that's one of the things we look at.
You need to look at the manager's track record. Have they previously done what they said they would do? So, pick up the PDS, product disclosure statement. See what assets they said they would buy and have they delivered on that?
And I know this is the old chestnut: Past performance isn't a guide to future, and that is case. I'm sure everyone says that, but what is does give you a sense for is have the manager outperformed over a long period of time. Look, we've been around for 25 years. We're Australian experts in commercial property.

David: Pre-GFC.

Steven: Yeah, pre-GFC. All our funds came through the GFC relatively well. A lot of managers, regardless of the sector, didn't make it through. We sailed through. Every fund was fine. Doesn't mean the returns were exactly like you'd want the GFC, but, look, property isn't any different to any other asset class. Nothing's foolproof, but what you do want to do is get the manager that has the right philosophy for you. So, as I said, longterm income return, who's paying the rent, so the tenant quality. And the final point I would suggest, and often overlooked, people can get caught up on the headline returns that a manager says. What gearing have they undertaken and are putting in? Gearing, just think of it, gearing is just another way to buy an asset that you wouldn't otherwise be able to fund. It increases the returns, but increases the risk.
Look, we think around 30 to 45% is the right gearing level. I see managers out there, 50, 60%, with higher returns, but you need to be very aware that, once you go over that 50% level, you're taking on a much higher risk profile.

David: You're looking at more ... Let's be honest. That's more a growth discussion. We're all about income.

Steven: Yeah.

David: So, you know, it's interesting you mention that because you do need to have that kind of level where you think, well, we're comfortable where we are. We're delivering a good return or potentially can with what we're taking on here. And it's a longterm investment. You know, it's not something where you get a lot of people who like trading on the stock market, and they'll stock pick, and they'll think, well, that's a good growth fund. This one's going to pay me a dividend of this. But the property market is designed for a longterm investor.

Steven: Yeah. Absolutely.

David: So you have that mindset to it, I'd say. Do you think it's interesting where, and this has just come back to what I'm used to with our readers and our listeners out there, with the residential side, diversification within property, have you had a conversation with investors who are looking for new ways to diversify within property and find new revenue streams in that space? Is that something which is commonly coming up these days?

Steven: Look, I've had, David, plenty of discussions over the years around residential property, and, look, you really need to consider what your total exposure is as well. So, residential property has done really well for some people, but you need to factor in, okay, if I own my house, I've got an investment property. How much does that actually represent of my total portfolio and total wealth that I'm looking after.

David: Yeah.

Steven: Commercial property is a good way to get some of the benefits of the property exposure that we've talked about already, but not have it so correlated to what's happening in the residential market because commercial property does not move in the same way that the residential markets do.
So, it gives you that diversification. Just like buying a bond portfolio or an equities portfolio, it does as well, and if you don't mind, I'll backtrack to what you were asking before around the different investments. I had an investor the other day actually call up, got passed through to myself, and said, "Oh, Steven. You've got a fund here that's distributing six and a half percent. I've got one on my desk that's eight percent. What are you guys doing wrong?" It was an interesting question and an insight into how they look at it sometimes. And then I looked at it and said, "Okay, you're aware the property's in far North Queensland?" It's a much thinner market. It can be disrupted by cyclones. There's a real risk. The property was partially vacant, and the gearing was 55%. So, you know what, an eight percent return probably, in my view, wasn't high enough for the type of assets that they were actually investing into.

David: Yeah, yeah, and that's such a powerful tool to know as well. I mean, people get caught up with yield. When I say people, I mean investors. Investors look for the highest number, and that attracts them. The annoying thing is that you want to go with someone who's essentially looking at the journey to get to that yield. You want to make sure that you're essentially investing into something which isn't going to just deliver or potentially deliver the highest yield. It's going to deliver the best experience as an investor to get to that point. I think if you're happy with a particular number and you have a goal in your mind in terms of what lifestyle you'd like and what kind of income you'll need to maintain that, there's no reason why people should get greedy and shoot above.

I think it's just a case of being savvy and saying, well, what's realistic. And that's a huge point, and that's interesting that you mention that.

Steven: That's a very good point. Five years ago, we actually had this discussion at the board level for the funds that I look after. Okay. What do you want to do? Property was going up, and we made the very conscious decision to stay at the institutional-grade property. So, what's that mean? Just a fancy way of saying the highest quality property available. So at the time we were distributing eight percent, but it was also a time before cheap money, before interest rates had fallen through the floor, before equities had accelerated as well. And we made the conscious decision that, okay, we'd rather focus on the same quality of assets even if that meant the distribution yield comes off.
And, look, I think that strategy's been very successful. It's taken some time to educate our investor base, and whilst I'd love everyone to come to Charter Hall, to be honest, I'd much rather people understand the sector and hope they do the research and understand how it can fit into their portfolio because I'm sure if people look at some of the things we're doing in this space, it could very much suit their needs.

David: Yeah.

Steven: It's really open as an investment class.

David: Yeah, a hundred percent, and I think that's a great point to summarise with, is just, and we always say, is to educate yourself, get yourself out there, understand what market you're investing into, you know, and be proactive in your own investments. A lot of people want to be self-directed for a reason, so make sure that everyone is sort of getting the right resources to back that.

Steven: We have a lot of, just on that point, self-managed super funds. And, as you said, they're the utmost one to be self-directed.

David: They are, yeah.


Steven: Look, we put out purely research pieces just to give people a feel for what's happening in the market. Some of the topics we have talked about today, what to look for in a manager, what gearing levels are appropriate because that education piece is just so important particular for that SMSF space.

David: Yeah, I think it's the pinnacle for that investment class, that criteria as well, just making sure that you have those resources. Being an SMSF trustee is not all as easy as it sounds, and I think people will forget that. So it's good that the resources are out there. It's just trying to find them.

Steven: Yeah.

David: Steven, look, I wouldn't have ever thought that this was your first podcast. You nailed it. But I do appreciate you coming in. I'd love to get you back on the show at some in the future as well.

Steven: Oh, thanks, David. Look, it's been a pleasure. Commercial property is a real passion of mine. I could talk about it all day. Yeah. Look, if you have me back, I'd be very pleased to be here.

David: Good man.

Steven: Thank you.

David: Awesome. And you can find more information around Steven, or you can follow what's going on with the Charter Hall team in the links below. We've got loads of Steven's blogs and insights around on nestegg.com.au. So do be sure to check those out if this has sparked some level of interest for yourself as well. Also, we are across all social media platforms, Facebook, Twitter, LinkedIn, and you can always get in touch at This email address is being protected from spambots. You need JavaScript enabled to view it.. Thanks again for tuning in. See you for the next one.

Bricks and stones investors know, but commercial can aid in diversity
Steven Bennett
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