Commercial property should be on SMSF trustee's agenda

With unlisted commercial property funds generating yields of more than 6% per cent and a strong long-term growth outlook for the sector, commercial property should be considered as a core asset for self-managed superannuation portfolios, a property fund industry leader says.

Steven Bennett, the Head of Direct at property fund manager Charter Hall, says it is time for more SMSF trustees to take a closer look at unlisted commercial property funds.

Speaking at the SMSF Association National Conference today Bennett says the most obvious attraction of the sector is the high-income yields it is generating – 6.25% and above for Charter Hall’s commercial unlisted funds versus an average of around 2.5% -3.0% for residential property.

Commercial leases tend to be for longer periods than residential leases. By way of comparison, the average lease term in Charter Hall’s Direct Industrial Fund No.4 is 16.7 years and the Direct Office Fund is 9.5 years, which compares favourably to a typical residential lease term of only six months to 1 year.

In the past, property fund managers were criticised for over-gearing their funds but that is not the case today, when dealing with large institutional property managers. Bennett says gearing levels for unlisted commercial property funds are around 45%. This is lower than the maximum gearing allowed on most SMSF limited recourse borrowing arrangements.

The outlook for the Australian property sector is positive, with the population of Sydney, Melbourne and Brisbane predicted to grow by 30% or more over the next 20 years. Population growth is a good long-term indicator of the ultimate demand for Australian commercial property. Population growth leads to demand for more office property to accommodate workers, more industrial property to manufacture or distribute goods from and more retail property where goods or services are ultimately delivered to consumers.

Bennett says there continues to be an ongoing and growing foreign investor interest in the local commercial property market with 30% per cent of Charter Hall’s institutional clients coming from 13 different countries. Offshore investors are attracted to the long lease terms that underpin Australian commercial property. Structured into the leases are regular rental increases, which provide certain income growth into the future. The positive attribute of a strong and growing income stream is just as relevant to SMSF trustees as to major offshore investors. 

Given the modest allocation to commercial property in most self-managed funds, any increase would provide significant diversification and portfolio construction benefits. Due to the low correlation between unlisted commercial property funds and other key asset classes like Australian equities and bonds, by including a 10-20% allocation to unlisted commercial property, the overall risk and volatility on the SMSF portfolio can be reduced.

Charter Hall is Australia’s largest provider of unlisted commercial property investments, with $18 billion of funds under management and 296 properties in its funds.