Takeouts:
- Commercial property is a feasible investment option for Australian investors
- REITs offer a gateway into commercial property investments
- REITs have the potential to deliver high yields, reliable income and protection from economic and business cycles
When investors hear the term ‘property investment’, most times the foremost thought is residential, whether it be a house, semi, unit or even a holiday rental. But what about the other property type: commercial?
APN Property Real Estate Securities Analyst, Mark Mazzerella in a Netwealth webinar titled, ‘Why investing in commercial property can be accessible for everyone’ discussed how commercial and residential property differ and why commercial property and Real Estate Investment Trusts (REITs) may be worth getting on your radar.
Regardless of what type of commercial property it may be (retail shopping centre, office building, industrial park, aged or child care facility or other), this asset class is often considered a high yield, low growth investment. Residential property on the other hand is generally thought to be a lower yield yet higher growth investment.
According to Mazzerella, the high yield aspect of commercial property is ultimately driven by the lease contract.
“The lease contract effectively locks in rental payments for long periods of time such as 5, 10 or even 15 years. This provides investors with a level of protection from the normal and economic business cycles as well as delivering predictable, repeatable, and sustainable cash flow in a similar manner to fixed interest investments, which have a great level of defensiveness and diversification for any investment portfolio.”
Another positive feature of commercial property is the type of tenants themselves, which typically include multinational corporations, ASX listed tenants and government departments, all providing the highest level of covenant quality.
These tenants are generally signed up for long-term periods of time compared to residential property, where the tenants are individuals and lock in much shorter contracts, sometimes for only 6-12 month periods.
Missing an opportunity?
Mazzerella suggests a lot of Australian investors may be missing out on the benefits of commercial property due to the mistaken belief that they can’t afford it.
“Many investors don’t think they have the finances to invest in commercial property,” said Mazzerella. “However, anyone can enter the commercial property via real estate investment trusts (REITs), which are an ideal way for investors to access some of the highest quality, professionally managed real estate in Australia.”
REITs enable investors to access commercial property and achieve portfolio diversification without the need for substantial upfront capital. The fact that REITs are listed and traded on the stock exchange also gives investors the ability to top up or dial down their exposure, to achieve their desired level of diversification.
With regards to performance, REIT’s generally deliver a high yield. According to Mazzerella, over the financial year of 2017/18 the yield across the A-REIT (Australian real estate investment trusts) is approximately 5.5%, a decent return when compared to current bond yields and domestic cash rates.
“Not only do REITs deliver a high yield, but they have other benefits too. Their capital growth tends to be consistent with CPI and GDP over the medium to long-term, they are tax-effective and they have comparatively low costs, driven by the economies of scale that come with the efficiencies of a platform that owns multiple properties.”
He added: “And there’s also the expertise in the fund management teams as they are often highly specialised across the REIT sector.”
When it comes to commercial property, it’s important to think global. Mazzerella believes commercial property in Asia represents strong growth prospects for investors, especially in developed countries such as Hong Kong, Singapore and Japan.
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Don’t just limit your thinking to Australia
“With over 150 REITs and more coming, Asia constitutes over 13% of the commercial property global value. Supported by above average economic growth, the REITs in established regions within Asia also display world class governance standards .”
Mazzerella considers ‘Japan Excellent’ a REIT listed on the Japan Stock Exchange, as a fitting case study of the returns possible in Asia.
“We at APN believe ‘Japan Excellent’, which holds a portfolio of office buildings, is a worthwhile investment. The strong activity of Tokyo, its robust economic activity and vacancy rates of only 4%, which make it one of the tightest vacancy rates in the world, means a positive environment for rental growth. This can easily be seen via its distributions of 6% per annum.”
APN’s Australian REIT fund and Asian REIT fund currently deliver a running yield of around 6.4% and 6.5% per annum respectively, which is paid monthly. REITs are an investment option that investors might want to consider adding to achieve diversification as well as a regular, relatively high monthly income within their portfolio.
About APN
APN Property Group is a specialist real estate investment manager that actively manages real estate investment funds on behalf of institutional and retail investors. APN manages almost $2.5 billion of funds, with over $1.5 billion of these invested in real estate equities across Australia and Asia. APN’s approach to real estate investment is based on a “property for income” philosophy.
At APN, its focus is on high quality assets combined with an index unaware style which enables them to consider investments with strong fundamental value.
Any reference to a particular investment is not a recommendation to buy, sell or hold the investment. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.