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If you have always wanted to invest in commercial real estate but weren’t sure how to get started, then this resource should help you to understand the commercial property market so you can make more informed investment decisions.
Commercial property investment can be attained through a variety of means. It’s a great way to diversify your investment portfolio and you can invest in a range of commercial real estate assets.
There are a few different ways to make a commercial property investment.
Investors can make commercial property investments directly, however, it can be expensive and requires an investor to do research and understand the market they are investing in. Investors should also forecast the ongoing profitability of the investment and assess the potential for long term capital gains. Once purchased, you will then need to manage your tenants, and the ongoing maintenance of the property.
An unlisted property fund is a form of property investment that provides investors the opportunity to gain access to higher quality institutional grade commercial property assets with a smaller minimum investment. By investing in an unlisted property fund, investors will receive units in the fund/trust which holds the property asset(s) that are managed by a professional property investment manager such as Centuria.
There are generally two kinds of unlisted property funds:
Australian Real Estate Investment Trusts (A-REITs) pool the resources of investors together to invest in a portfolio of property assets. They generate most of their income through rent, with the majority of this income returned to investors via distributions. An investor prioritising liquidity tends to be drawn to listed property investments because units in the A-REIT can be purchased and sold on the Australian Securities Exchange (ASX).
Commercial property can be broadly categorised as a property which has a direct commercial use. We can divide commercial property into four broad groups:
Retail properties are spaces that are used to sell or market consumer goods and services. They include single shops through to large shopping centres or malls.
Office property is space that is used for business purposes and includes large multi-storey office towers through to smaller suburban spaces. Office real estate will include additional facilities for the tenants including end of trip facilities, kitchens, meeting rooms, toilets and desk spaces. Find out more about Office Real Estate Investing.
Industrial spaces can be extremely large warehouses that are utilised for manufacturing, storage and logistics purposes. On the other end of the spectrum, industrial properties can be smaller and sometimes have a mixture of warehouse and office space. Tenants typically range from logistics distributors to those producing goods. Find out more about investing in Industrial Real Estate.
Healthcare property generally includes real estate that contains healthcare facilities including hospitals, day hospitals and medical centres. The healthcare sector is underpinned by growing non-discretionary demand for healthcare services.
Commercial property can help to bring diversification to your investment portfolio. Diversification helps to lower your overall risk and helps in achieving more stable returns.
Diversification is a great strategy against a single investment volatility or one asset class performing poorly (e.g. a fund manager failing or a collapse in the share market).
With market movements happening all the time, diversification can help to flatten out the overall performance of your portfolio i.e. when some decrease in value, others may increase and balance out the fall. Overall, diversification lowers the risk to your portfolio performance as no matter what happens in the economy, some investments are likely to benefit.
Commercial property investment is underpinned by the tenants who pay rent to the owners of the building – in Centuria’s case, that would be the fund. The profit on the rent is then distributed to the owners of the fund in the form of distributions.
What this means is that the relationship with and quality of the tenants are paramount. In Centuria’s case, we believe this to be a real point of difference in our acquisition strategy and our preference to actively manage our buildings.
We recommend talking to your financial adviser to evaluate your risk profile and whether a commercial property investment would be right for your investment strategy. You should also read the offer document for more information on investment considerations and risks relevant to the financial product.
Some factors to consider when investing in listed and unlisted property funds include, but are not limited to, stock market volatility, the ability to exit the investment (liquidity), the gearing of the properties in the fund and understanding the individual characteristics of the properties held by the fund (e.g. tenant demand, property valuation metrics, cash flow sustainability, WALE, yield, tenant profile, age of building, NABERS ratings, outgoings, location etc).
If you are looking to invest in a commercial real estate asset through a fund manager, then it is important to know that your chosen property fund manager has experience appropriate to optimising your investment. Before investing, here are some important questions to ask about a fund manager;
Over 20 years of experience have given Centuria an understanding of the commercial property market cycle, the geographical levers, and demand for the particular types of commercial real estate. This helps with the acquisition and sale of commercial properties in our portfolio.
* Past performance is not a reliable indicator of future performance
As with any investment, there are always benefits and risks that you should weigh up before making any commercial property investment decisions. A financial adviser can always help in working through what these are and how they may suit your risk profile. In short, these are some of the pros and cons of commercial property investment.
Potentially strong returns: combination of the potential for capital gain and income
Historical performance: Over the past 20 years Australian listed property has had higher returns compared to many other asset classes1
Income stability: commercial properties that have longer leases lock in tenants for longer periods
Tax benefits: substantial depreciation allowances in the form of tax deferred distributions
Diversification: Commercial property can assist with diversifying investments across different asset classes. In addition, there are lots of different types of properties to diversify into
Capital gains: commercial property investment has the potential for capital gains if the property value increases
Longer lease terms: usually leases are between 3-15 years as opposed to six months for residential property. This provides longer income certainty than shorter lease terms.
Reduced overhead costs: unlike a residential tenant, the commercial property tenants sometimes pay for all the repairs, maintenance, property management fees and rates in the building.
Net distribution returns: that will often compare favourably to residential property investments (after factoring in gearing).
Potential to add value: as with residential property, it is possible to improve the value of a commercial property investment, however, it will require planning and incur costs.
Stock Market Volatility: if you are investing in commercial real estate via a REIT, the fund can be influenced by market sentiment as well as the underlying value of the assets.
Valuation risk: commercial property investment has the potential for capital losses if the property value decreases
Liquidity of the property fund – different types of investment have different liquidity levels:
COVID-19 risks: Any failure of a tenant to pay rent, rent abatements or a reduction in demand will impact the Fund’s revenue. A downturn in the property or share market (REITS) will have an adverse impact on the value of the fund and return to investors. Existing risks may also be affected or heightened.
Gearing of the property: commercial investments typically have associated borrowings from a bank, which enables access to higher value assets, and potentially higher value returns. The gearing level, which reflects how much debt is being borrowed is important. Gearing can magnify gains or losses. Centuria’s gearing of its property assets is typically between 35%-45% of the initial value of the property, which is relatively conservative.
1. Source: Lonsec Investment Consulting Australian Investors Chart Pack – June 2020. Past performance is not a reliable indicator of future performance.
A-REIT (or Australian Real Estate Investment Trust) – pool the resources of investors together to buy a range of property assets, which the trust then manages for a profit. They are listed and can be exchanged on the ASX.
Gearing – a measure of how much an investment is funded using debt versus the equity provided by investors. Also known as Leverage or LVR.
IM (or Information Memorandum) – an offer document produced for the sale of a product or asset to wholesale investors.
Leverage – the ratio of a company’s loan capital (debt) to the value of its equity. Also known as Gearing or LVR.
Liquidity – refers to how easy it is to convert assets into cash.
Listed property trust/fund – a unitised portfolio of property assets, listed on the Australian Securities Exchange (ASX). Also known as a REIT.
LVR (or Loan to Value ratio) – the amount borrowed to purchase an asset (e.g. building/property), represented as a percentage of the value of the asset. Also known as Gearing or Leverage.
NABERS (or National Australian Built Environment Rating System) ratings – can be used to measure a building’s energy efficiency, carbon emissions, water consumed and waste produced to produce star ratings which can then be compared to similar buildings.
PDS (or Product Disclosure Statement) – a legal offer document for a financial product.
Property syndicates – property syndicates are a pooled property investment usually facilitated by a fund manager. Many investors are able to pool their money to buy a property that alone they would not have the funds to purchase.
REIT (or Real Estate Investment Trust) – pool the resources of investors together to buy a range of property assets, which the trust then manages for a profit. They are listed and can be exchanged on local Securities Exchanges. Also known as a listed property trust/fund.
Unlisted property fund – a form of property investment that provides investors the opportunity to gain access to commercial property assets through an investment in a fund.
WALE, or Weighted Average Lease Expiry – is the way to measure the average time period that all leases in a commercial property will expire.
Yield – a measure of returns to investors that is expressed as a percentage over a set period of time.