Pursuit of yield turns the spotlight on commercial property
Savvy investors are looking at their asset allocation and considering investment alternatives in commercial property.
With interest rates globally at record low levels, even negative in some countries, the biggest game in town is the search for a good rate of return, or yield.
In Australia its one of the reasons the big four banks are trading at near all time highs on the stock exchange. They are paying a dividend yield of around 5% at current high prices. At the same time many commentators are warning investors that bank shares can’t go much higher, especially as they are trading at around three times book value, whereas in the US, UK and Europe big banks can be purchased at around one times book value.
Consequently many savvy investors are looking at both their asset allocation and their individual equity investments.
There has been much media attention recently on the issue of retirement savings portfolios and purchasing residential property. At the same time there have been a number of warnings from regulators about the risks involved in borrowing to fund such investments.
One major sector of the property market has tended to be overlooked in this discussion, namely high quality commercial office and industrial property.
Real Estate Investment Trusts, commonly known as REITs, are one such investment class where these type of property assets can be accessed. The pluses include the expectation of consistent yields, currently averaging around 5%; liquidity, as REITs are listed on the Australian Stock Exchange; and often, the prospect of capital appreciation.
On the other side of the equation the price of REITs usually correlate with share market movements, thus introducing the issue of volatility and diversification. In addition, in recent times, REITs have tended to trade at a significant premium to the net asset value which takes into account the current independent valuations of the underlying properties.
The other avenue for investors wishing to add high-grade commercial property to their investment portfolio or SMSF, is direct property, also known as unlisted property trusts.
The advantages here are generally higher returns than REITs- for example Charter Hall, one of Australia’s largest and most successful property investment managers, has a number of funds currently in the market offering expected yields of more than 7% pa, plus the prospect of capital uplift upon the termination of the fund when the asset or assets are sold.
A 7% yield on an unlisted or direct property fund equates to a 40% advantage on, say, a REIT showing a 5% yield.
Direct property also has the attraction of being less correlated and therefore less volatile than REITs and shares. Where’s the catch? Direct property is less liquid than the former two classes of investments. Many direct property funds do offer regular liquidity events, or liquidity windows, where investors can apply to redeem some of their investment. It must be said however, that direct office and industrial property funds are designed as medium term, solid return investments. They should not be considered to be in the liquid basket of one’s investments. That’s what cash, near cash and listed securities are for.
They do offer an expectation of capital growth over the life of the fund, which is generally around the five-year mark, as well as regular returns. To use Charter Hall as an example again, the two unlisted funds they currently have on offer are projecting total returns over the life of the fund of around 10%pa - very attractive when bank term deposits are wallowing at around for 3%pa for tying up your money for a comparable 5 year period.
Liquidity, yield, correlation to other asset classes, volatility, total return and of course security of the investment will always be the key issues for investors to consider and determine which mix is right for them.
When it comes to commercial property, the key point should be investing with a known and highly reputable investment manger with a sound track record and seeking advice from a trusted professional advisor.
The bad news for investors is the consensus of expert opinion is that this low yield environment has many years to run. The good news? There are higher yielding quality assets out there.
For more information on commercial property investment opportunities go to www.charterhalldirect.com.au