Australians have a long-held love of residential real estate. But there are good reasons to consider commercial property investments as part of your property portfolio too. We explain ways to invest in commercial property in Australia – and what’s in it for you.
At any Australian gathering, chances are the topic of property prices will come up. That’s because we have traditionally been keen investors in residential property through our homes or rental investments.
But there’s a whole other side to property – and that’s commercial real estate.
It may not be as well-known, or as well-understood, as houses and apartments, but investing in commercial property in Australia can bring a trifecta of benefits to your portfolio. These include:
- Stronger rental yields and healthy cash flows
- Potential capital growth, and
- Valuable diversification.
The catch is that many Australians are uncertain about how to invest in commercial property.
So, let’s take a deep dive into how to buy commercial property in Australia – including affordable ways to invest in commercial real estate that don’t involve taking on substantial debt.
Why invest in Australia’s commercial property market?
Commercial property in Australia broadly falls into one of three main categories:
- Retail property
- Office property, and
- Industrial property such as warehouses.
Other types of properties are available including medical facilities and hospitality venues.
In fact, the diverse nature of the commercial property market in Australia is one of its strengths.
The key question is how to get started in commercial property. Here’s a closer look at how it can be done.
How to buy commercial property in Australia
If you are thinking about investing in commercial property in Australia, there are several potential pathways to take.
Each has its own upsides and potential drawbacks.
1. Investing in commercial property directly
A direct purchase of commercial property involves acquiring one or more properties outright.
Like any direct investment, this brings both pros and cons.
Pros of direct purchase
- Directly owning a commercial property in Australia gives you full control over investment decisions and asset management.
- You are free to select tenants and negotiate lease terms as you see fit, though successfully purchasing and managing investment-grade commercial assets can call for a high level of expertise and experience.
Cons of direct purchase
- You are likely to face a high capital outlay and/or be required to take on significant debt to fund the property.
- Most investors can afford to own just one directly held commercial property in Australia. This means concentrating risk into a single asset.
2. Joint venture (JV) or partnership
Investing in commercial property through a joint venture or partnership involves pooling your capital with one or more parties to share the risk and rewards of the commercial property investment.
This option can let investors leverage the combined strengths of different co-owners.
However, there are important legal and operational factors to consider.
Pros of a joint venture/partnership
- By combining capital you may be able to access higher-value properties that you could not afford to buy on your own.
- Investing with more than one party means sharing resources and spreading risk.
Cons of joint venture/partnership
- The more investors you have in a joint venture, the more complex its structure can be. Coordinating decisions among stakeholders can lead to delays or even conflicts.
- Shared control calls for a clearly worded agreement so that each investor knows where they stand under a variety of circumstances – including if one investor (potentially you) wants to exit the investment early.
3. Real Estate Investment Trusts (REITs)
Another option to invest in commercial property in Australia is through an Australian real estate investment trust (A-REIT) listed on the Australian Securities Exchange (ASX).
A-REITs work like a listed managed fund in that your money is pooled with that of other investors and the assets within the trust are overseen by a professional team.
Depending on your choice of A-REIT, the trust can spread your money (and risk) across a variety of commercial properties and sectors, or it may concentrate on one market such as office properties.
The main point is that by pooling your capital with a large number of other investors, you gain access to high-value assets, such as large shopping centres, for a relatively low capital outlay.
Pros of A-REITs
- You may be able to buy into an A-REIT with as little as $500 – that’s the minimum marketable parcel for ASX-listed investments.
- As an ASX-listed investment, A-REITs can be bought and sold within a matter of minutes. This makes A-REITs highly liquid, giving investors easy access to their money if needed. However, this can also have negative implications for the trust’s volatility (more on this below).
Cons of A-REITs
- As A-REITs are listed on the ASX, a trust’s value can rise or fall in line with market sentiment. A broad market downturn, for instance, can see A-REITs fall in value, even though there may be no change in the value of a trust’s underlying properties.
- A-REIT distributions may be paid less frequently than unlisted funds (see below), potentially requiring greater cashflow management from investors.
4. Unlisted commercial property funds
Like listed property funds, unlisted commercial property funds offer an opportunity for individual investors to buy a stake in a single, high-value commercial property or portfolio of properties through a pooled and professionally managed structure.
However, as the fund is unlisted, investors don’t face the same level of volatility and price movements as seen across the ASX.
While investors contribute capital, the fund manager is responsible for everything from asset selection to property management, enabling investors to assume a more passive approach. This does mean, however, that you need to be confident you are dealing with an experienced fund management team.
Pros of unlisted commercial property funds:
- Commercial property funds often require a lower capital outlay than purchasing commercial property directly. As a guide, an investment in our funds at Westbridge Funds Management typically starts from $50,000 to $100,000.
- Professional management is a key benefit of unlisted commercial property funds. Investors can leverage the extensive expertise of the fund manager in acquisition, leasing strategies, and ongoing management, which can help to minimise risk and maximise returns.
Cons of unlisted commercial property funds
- As units in unlisted funds are not traded on open markets such as the ASX, unlisted property funds (particularly closed-ended funds) can be less flexible when it comes to redeeming your money than publicly traded assets such as A-REITs. In the case of closed-ended funds, the fund manager will outline the target term at the outset of the fund, which gives investors an ideal holding period to maximise returns.
- Some unlisted commercial property funds, particularly those deemed higher risk, may have eligibility restrictions. Commercial property funds focused on development or value-add strategies, for example, may be restricted to wholesale investors with more experience and capital to invest.
How to invest in commercial property with Westbridge
Buying commercial property for investment in Australia can be a rewarding option for investors keen to benefit from regular income, capital growth, and portfolio diversification.
However, the sheer cost of quality assets means many investors choose to leverage the expertise of a professional acquisition and management team.
At Westbridge Funds Management, we provide access to premium-grade investment opportunities across a range of commercial asset classes via our unlisted property funds.
Our funds offer diversification, opportunities to combine regular income with the potential for long-term capital growth, and a chance to leverage the expertise of our experienced management team.
To find out more about investing in commercial property with Westbridge, click here.
Recommended
What is IRR and why does it matter?
Are you a retail or wholesale investor?
How to invest in commercial property in Australia
What’s the difference between listed and unlisted property funds?
Tax-deferred income – a hidden perk of unlisted property funds