Commercial property can bring plenty of pluses to your portfolio, and there is a streamlined way to invest. Here we explore some options for how to invest in commercial property in Australia.
Why invest in commercial property?
As an asset class, commercial property has many appealing characteristics. Leases tend to be far longer than in the residential market and the lessee is typically responsible for many of the ongoing costs, such as maintenance. Also, the returns on commercial property – both yields and long term capital growth – can be very attractive.
How to invest in commercial property?
For investors however, a key stumbling block can be ‘how to invest in commercial property’ in Australia – and is it a good idea?
One option is to invest directly, buying a commercial property such as a small warehouse, and using the services of an experienced property manager to enjoy a hassle-free investment.
This strategy has its merits, including direct control of the type of property and its location. However, there are downsides. Investors can find their financial resources are limited to one property – and that means a lack of diversity. In other words, pinning all your hopes on just one asset in a single location – thereby increasing your risk profile.
Investing directly can also involve taking on a significant debt to fund the purchase, something not every investor can, or wants, to do.
An easy way to invest in commercial property in Australia
If you’re not sure how to start investing in commercial real estate, a straightforward solution can be a commercial property fund.
In effect, this allows you to become a part-owner, along with other investors, of the underlying properties held by the fund. These can include shopping centres, office blocks, industrial complexes and large warehouses – high value properties that are beyond the reach of many individual investors.
(L-R): Commercial assets in the Retail, Diversified Fund No. 3 and Banksia Grove Funds.
Why invest in commercial property via a fund?
Investing in commercial property through a managed fund can benefit investors in several ways:
1. Ease of access
Investing in a commercial property fund is a lot easier than buying as an individual. The fund management team does the hard yards of researching the market, short-listing and inspecting potential properties, and managing those properties that make the cut for the investment fund.
In fact, the overall experience can be very streamlined. Unitholders normally receive most of the rent from the properties held by the fund, plus a share of capital growth if the property is later sold at a profit.
In addition, a portion of fund distributions may be classified as “tax deferred” or “tax advantaged”. This can significantly increase an investor’s after tax cash flow during the investment term.
2. Selection of high quality properties
When you invest in commercial property through a professionally managed fund, you can be confident that you’re putting your money into a high-quality asset(s). That’s because the fund management team will follow a stringent selection process that addresses:
- Location – as with all real estate, location matters in commercial property. Proximity to strategic transport hubs in particular, is essential for tenant appeal.
- Local demographics – the success of a commercial property can be shaped by the demographics of an area, as this can dictate the availability of a labour force as well as providing a nearby customer base.
- Tenant appeal – the nature of a commercial building is important. Multi-tenant properties can offer protection from vacancies with appeal to a broad range of tenants. On the flipside, a property that can attract a single blue-chip tenant can provide stability of returns.
- Environmental sustainability – features like water reticulation and re-use of grey water have the potential to add value to a commercial property (and tenant appeal), by trimming long term maintenance costs and strata levies.
3. Management of vacancy risk
The fund manager will consider the vacancy risk of a property by looking at the lease terms for current tenants, and address ways to encourage tenants to exercise their option to extend the lease.
What to look for in a commercial property fund?
As we’ve seen, uncertainty around how to invest in commercial property can be overcome by selecting a commercial property fund rather than direct ownership. But it does mean choosing your fund manager with care.
A key factor to look for is experience. A skilled manager will have a strong track record of selecting quality properties, and maximising the value of the site to the benefit of investors.
Discover how easy it can be to invest in commercial property
The Westbridge team is comprised of skilled commercial property experts, who are committed to sourcing high-performing commercial property assets. Get in touch with us via the form below to learn more about how to invest in commercial property in Australia, and our latest investment opportunities.
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