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% to 20% 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%, 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. The direct property funds Charter Hall currently have on offer focus on generating predicable income in the range of 5-7 % p.a. plus some capital gain, making the projected total return of around 9-10% p.a. or more over the life of the investment.
An example of this is Charter Hall Direct’s newest fund open to investment, the Direct Consumer Staples Fund, which focuses on generating income from adiversified and growing portfolio of properties leased to distributors and producers of consumer staples goods. The fund pays distributions monthly, at a forecast income return of 6.89% per annum.
When considering commercial property investment, seek financial advice to ensure you understand the potential risks and benefits involved.