Whether you’re new to investing or know a thing or two, there’s a lot to discover.
One thing you’ll have heard is the importance of a diverse portfolio. Having a wide range of investments can help manage the ups and downs of individual asset classes.
Investing in commercial property - directly or via listed real estate investment trusts - can complement other asset classes in an investment portfolio. At Charter Hall, creating and managing these types of investments is our speciality.
Direct property can provide the potential for capital growth over the long term, offers diversification benefits, and access to regular income that isn't necessarily correlated to listed investments.
Investments in listed real estate trusts also offer potential capital growth and diversification benefits. As it can be traded on a stock exchange, these types of investments can also provide the benefit of liquidity.
Hear from Steven Bennett, Head of Direct at Charter Hall about the importance of commercial property in your investment portfolio.
On this page, we’ll cover the basics of commercial property investment, including advantages and risks, how to get started, and what potential returns to expect.
Direct funds or listed real estate investment trusts (REITs) often provide access to high quality commercial properties in diversified portfolios. You can invest as an individual, through a self-managed super fund (SMSF) or through other entities such as companies or trusts.
Common commercial property types include:
Before we proceed, these are some of the important commercial property terms will be helpful to understand when considering investing in commercial real estate.
One of the most important things to know about investing in commercial or residential property is that, while there may be similarities between the two markets, they have different investor and occupier profiles. Below are some characteristics to be aware of.
Residential property typically has a lower capital price compared to the other commercial real estate classes. A commercial office, industrial or retail asset typically requires significantly more capital to acquire and maintain. As such, direct investment in commercial property is undertaken by a fewer number of investors who have the required knowledge and financial capacity to purchase multi-million-dollar assets; and the operational capacity to undertake the day-to-day management.
The lease profiles between residential and commercial are markedly different. Commercial real estate leases are usually longer, typically ranging from three to 20 years. These commercial leases usually benefit from fixed annual or market related annual rental increases.
Commercial property leases tend to be to quality tenants which generally have low risks of defaulting. These include tenants such as Commonwealth or State government agencies or well-regarded corporations. Good managers undertake comprehensive tenant analysis and target quality tenants through economic cycles.
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As with all investments, an investment in commercial property carries a number of risks. Below are a few of the key risks that you should consider. However, the risks detailed below are not an exhaustive list and you should read the relevant fund Product Disclosure Statement in full before deciding whether to invest in any fund and if you are in any doubt, you should consider consulting your financial adviser, stockbroker or other professional advisers.
There are three typical ways individuals in Australia can invest in commercial property:
Commercial property investment via a direct property fund can offer sustainable and stable income and the potential for capital growth. You can gain access to high-quality properties, and by doing your research into yields, occupancy and WALE, you should have a better idea of which properties will make for good investments.
If you’re interested in the benefits of a direct or listed property fund, talk to your financial adviser about Charter Hall or contact us directly.
What is the expected return on a commercial property: If you know a thing or two about investing you'll understand that while commercial property can generate stable and long term returns, you will need to refer to the individual fund's product disclosure statement for further information.
There are some key things to understand when assessing performance though, including how performance is measured, how commercial property is valued and how we choose our investments.
You will see commercial property investment performance expressed in a few ways.
The performance of a building may be described by cap rate or rental yields. The cap rate is worked out by dividing net income (income such as rent minus costs) by the building’s market value. This percentage shows you the return based on the property value and outgoing costs.
You will also see mention of WALE and occupancy rates. These don’t tell you how much money to expect back based on your investment, but can tell you the risk of investing in a particular property. If occupancy rates are low, it means there aren’t many tenants - as we know, vacancies may take time to fill.
Low WALE suggests that tenants haven’t agreed to a long lease, or the lease for higher-weighted tenants will expire soon. This could lead to future occupancy issues.
Value in commercial property is driven by a number of factors including the size, location, and quality of the asset, as well as the number and type of tenants. These factors are assessed by both fund managers and independent valuation companies in an effort to determine the expected returns from a given property.
Valuation metrics include but are not limited to:
Charter Hall Group has been investing in and managing commercial properties for decades, holding a wide variety of high-quality property assets. That level of tenure cannot be attained without a significant degree of expertise, making us one of the country’s most trusted fully integrated property groups.
Our people are our difference. Charter Hall employs best-in-class property and investment professionals to ensure that we can find, acquire and manage commercial real estate assets all across Australia.
We maintain extensive relationships with potential sellers and commercial agents to generate a flow of real estate investment opportunities, both on and off market. Additionally, we actively monitor the market for properties of interest that are publicly advertised. Once properly assessed, we acquire or develop the properties in question. This decision is based on the value of the property as well as its predicted performance.
You can gain access to high-quality properties by investing in a managed fund or A-REIT, and by doing your research into yields, occupancy and WALE, you should have a better idea of which properties will make for good investments.
If you’re interested in the benefits of a direct or listed property fund, talk to your financial adviser about Charter Hall.
With decades of experience and a history of success, we’ve become one of Australia’s leading property groups. To apply for a Charter Hall investment, download the product disclosure statement and discuss the investment with your adviser.
If at any point you have any questions, please don’t hesitate to contact our team.