Reports of growing investor interest in smaller commercial assets such as shops, medical suites and childcare centres has made me reflect on how often the accessibility of direct commercial property can be mistaken for simplicity.
For the right investor, with the right tenant, at the right price, buying a smaller commercial asset directly can absolutely play a role in building wealth but there’s a difference between owning commercial property and managing concentrated risk.
Take a common scenario where an investor commits around $1 million to buy a single commercial asset.
On paper, it can look attractive – tangible property, a lease in place, and the appeal of direct ownership – something you can drive past and say, “that’s mine”.
But underneath the surface sits a very concentrated position:
- a large chunk of capital tied up in one asset;
- often supported by personal debt (generally up to 70% max debt);
- reliant on one tenant or a small number of tenants;
- often the tenants are smaller scale with limited financial reserves;
- often inferior location compared to larger assets; and
- exposed to one location, one lease profile, one outcome.
If that tenant vacates, struggles, or fails in a tougher economic environment, the impact can be immediate. Income can stop, incentives may be required to re-lease, holding costs continue, and vacancy can stretch far longer than expected, particularly where the tenant profile is smaller and more vulnerable to changing conditions.
I’ve personally seen some investments have a tenant work well for them for five years then they vacate and there is up to 2 years to get another tenant in, causing massive cashflow issues.
That doesn’t make the original investment wrong, just that the investor may have taken on more concentration risk, tenant risk and personal balance sheet risk than they first realised.
Compare that example with a commercial property fund structure.
With the same $1 million, an investor may be able to spread capital across multiple funds to gain exposure to multiple larger assets and stronger tenant covenants. Instead of backing one smaller tenancy, they may be indirectly invested across several properties leased to larger businesses, often with better diversification by sector, geography and lease expiry.
There are other practical differences too:
- debt is non-recourse to the investor personally;
- the assets are professionally managed;
- leasing, compliance, reporting and administration are handled by specialists; and
- investors are generally passive, rather than buried in paperwork, bank requirements, lease negotiations and day-to-day issues.
In fact, one of the most common things I hear from investors who have done both is:
“I didn’t realise how much work came with owning a commercial property directly”.
Often this investment is part of a retirement plan and, as an investor, you want to be enjoying your retirement doing things you worked hard to enjoy like playing golf or travelling, not managing paperwork.
When you diversify across multiple funds and assets, you’re not just diversifying properties and tenants, you’re also creating the potential for capital returns, income distributions and profit events to occur across different years. That can be helpful from a cash flow and tax planning perspective, rather than having all outcomes tied to one asset and one eventual sale event.
Of course, funds don’t suit everyone. They can mean less control as each fund is tied to its own strategy. There is no liquidity so you can’t just sell down early, and investors need to place trust in the manager and the underlying discipline of the portfolio. This is all why choosing the right manager is so important. Of course, strategy, structure and asset quality matters but by aligning with a manager, you’re entering into a long-term relationship, so you need to be sure there’s a solid base, track record and feeling of alignment.
This isn’t an argument that buying commercial property direct is bad and funds are good. It’s really a reminder that investors should look beyond the headline yield and ask:
- How concentrated is my risk?
- How exposed is my personal balance sheet?
- How strong is the tenant covenant?
- How much time and involvement do I really want?
- And am I building one asset… or a portfolio?
Because in commercial property, the investment itself is important but investors need to equally consider how the risk is carried and if that’s something they can, and want to, manage themselves.
