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When you think of commercial property investing, perhaps your imagination soars to the top of the tallest building. Then, a multi-million price tag sends you back to earth.
How can you afford to invest in commercial property? So, you tell yourself to stick with what you know, investing in the share market and your super.
The good news is there is a more affordable way to invest in commercial property. Let us walk you through how to diversify your investment portfolio with quality unlisted industrial, office or healthcare real estate funds.
A commercial real estate investment fund can diversify your portfolio and protect your capital during challenging economic times.
Key to your consideration of investing in commercial property is the question of buying direct or buying into a fund.
Unlisted commercial property funds have been among the highest performing asset classes over the medium term (five years)1. Unlisted commercial property funds realised a five year annualised return of 17.4%. Compare that to the direct property market total return of 11.4 % (over 12 months to 31 December 2021), according to the latest factsheet from MSCI, Zenith, PFA and PCA. Each asset class will have different risk profiles and performance should be reviewed having regard to these risk profile differences. It is important that you understand the risk of investing into each asset class before making a decision to invest.
It’s also worth noting that past performance is not a reliable indicator of future performance of an asset class. The comparison is to point out that this return wouldn’t be possible without the Australian economy recovering, offshore investment in commercial property and instruments like unlisted retail, healthcare and industrial funds for interested individual investors.
Whilst performance of a stock, property or other asset class is a core reason to put your faith in it, there are other benefits of unlisted commercial property fund investing. Unlisted commercial property funds offer regular distributions (from rental) and have the potential for long-term capital gain income. Additionally, this is an opportunity for investors to gain exposure to the commercial property market at a lower entry point and without responsibility for managing the investment property.
Centuria Capital offers open- and closed-ended unlisted commercial property funds. An ‘open-ended’ unlisted fund accepts investment on an ongoing basis because it acquires new properties continuously. A ‘closed-ended’ unlisted commercial property fund opens once when (usually) a single property is acquired and investors receive units that are not redeemable until the fund is terminated, usually within five to seven years. Check our website for open ended unlisted funds.
We can’t tell you when is the best time to invest in the unlisted commercial property market because we don’t have a crystal ball, but we’re happy to share information on how real estate investing works. Let’s get started.
To put money into commercial property the intelligent way, you need to know the lingo and what they mean for you as a commercial real estate investor.
Real estate investment trust (REIT) is “a unitised portfolio of property assets, listed on the Australian Securities Exchange (ASX). They are an alternative to direct property investment and can be used to provide portfolio diversification, a diversified and professionally managed portfolio of real estate assets, which would not otherwise be available to the individual investor” according to the Australian Investors Association.
Commercial property is valued by its capitalisation rate (e.g. ‘cap rate’). To calculate the cap rate of a commercial property, divide the net operating income of a property by its value (e.g. purchase price). The cap rate is intended to show the potential for return of the property, represented as a percentage. Seasoned investors use cap rate to compare between opportunities.
Capital growth of a commercial property fund is the difference between the market value of the asset and the value at the time it was acquired. Generally speaking, you want to invest in a commercial property that has a high potential for capital growth.
Retail property covers a broad range, from small shops to larger shopping centres and these properties need to be maintained at a high level and may have higher capital expenditures than the other major classifications of commercial real estate.
Office property is a sector that relies heavily on government and corporate leases (i.e. commercial tenants) that can be long-term (5-10 years) and have fixed annual rental increases. The grade of office property (‘A’ being the highest) is determined by a host of factors including new construction, environmental sustainability, professional management and others, according to the Property Council of Australia.
Industrial property is a sector of commercial property that can have a wide range of uses including cold storage, data centres, multi-use space, warehouses, flex buildings and manufacturing of all types. Key to the value of industrial property is the economy, access to infrastructure (i.e. roads or airports), and interest rates.
Specialist property is generally built for a specific purpose such as hotels, medical centres, elderly care facilities and childcare. These types of property need operating management to meet requirements of regulators and insurance and a quality lessee.
Unlisted property funds are not available on the ASX. An unlisted property fund is a form of direct property investment via a fund generally managed by a property funds manager. Depending on the fund objectives, a minimum investment could entitle you to monthly distributions and periodic withdrawals of your funds as needed.
Now that you know you can put money into office buildings, industrial parks or medical centres through unlisted commercial property funds, you’re probably wondering how much it’s going to cost you. Will you need to borrow money to invest in a property fund as you might to invest in a vacation property or duplex? How do you finance your commercial property investment?
As we covered earlier, in order to make a direct commercial property investment you’ll need large sums of money. This type of investment is typically out of reach for most individuals; even seasoned investors don’t have the funds or the access to a new or high-value commercial property. That’s where unlisted commercial property funds provide investors looking for diversification and income without a huge outlay from the start.
Centuria has three open-ended unlisted property funds , the Centuria Diversified Property Fund (CDPF), the Centuria Healthcare Property Fund (CHPF) and the Centuria Agriculture Fund (CAF) that require a modest starting investment of $10,000. Centuria also offers closed-ended property funds with a fixed term when opportunities arise. If you would like to be alerted to this type of commercial property investment, register for updates.
If you want to use superannuation funds to invest in a property fund, you can do so either directly or through your self-managed super fund (SMSF).
Investing in a commercial property fund is a much more attainable way to diversify your portfolio and participate in one of the better performing asset classes available.
It may go without saying that when you invest in a property fund, you aren’t managing the property. So, who is responsible for managing the asset?
The fund manager typically attracts and negotiates commercial leases and manages the day-to-day operations such as maintenance and ongoing improvements to the property. They will inform investors about potential sale of the property and they will handle the details of the sale and issue your capital and any capital gains that have been earnt. In short, when you invest in an unlisted commercial property fund, the professionals with specialty knowledge handle the rest.
If you are interested in diversifying your portfolio with an unlisted commercial property fund investment, we’re here to answer your questions. Contact Centuria Capital today.
1. Refer to the factsheet. Medium term (5 year) performance only. Other asset classes outperformed unlisted commercial property funds for shorter time periods.
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