Ways to invest in commercial real estate
While investing in commercial real estate directly may be beyond the affordability of most people, there have evolved numerous other ways for smaller investors to get access to this strong asset class. In particular we focus on A-REITs and unlisted property trusts.
To invest in commercial real estate directly yourself, with or without borrowings, is commonly used for residential property investment, but for commercial property this is only an option for very wealthy investors or for smaller investors buying smaller, cheaper properties.
Unless you have a lot of money to invest this is not a realistic method of gaining exposure to larger commercial property, and having any diversification is even more challenging. In addition, to realise even a portfolio of your investment you must sell the property.
Sometimes a group of investors get together (either privately or with the help of a manager) to pool their money and buy a property.
There may be limited legal agreements and there is often only limited professional involvement around the choice of assets and their management, This type of investment generally requires a substantial level of investment by each investor and may or may not include borrowing. Often there is no way to exit your investment unless you can find another buyer or the property is sold.
Again, unless you have a large amount to invest the property type is limited and diversification is difficult to achieve.
Pooled Professionally Managed Property Trust
This is when an investor makes a property investment through a professionally managed investment product, which is regulated by the Australian Securities and Investments Commission (ASIC). In Australia there are two major types of these trusts: ASX real estate investment trusts (A-REITs) and unlisted property trusts.
There are several benefits that investors gain from using trusts:
- Investors funds are pooled, providing access to assets they couldn’t otherwise purchase individually, such as large office buildings or major shopping centres
- Internal gearing is non-recourse to investors, which reduces individual risk and makes them available to self-managed super funds
- Regular income stream – distributions, range from monthly to six monthly payments
- You get a share in any capital growth proportional to your holding in the trust
- Tax-deferred income, increasing your after tax return
- Professional management – covering due diligence, debt, property and tenant management
- Liquidity – dependant on the structure
- Only a small investment is usually required, allowing you to diversify your investment funds across properties and managers.
ASX-listed Real Estate Investment Trusts (A-REITs)
ASX-listed property trusts used to be called listed property trusts but are now known as A-REITs. They invest in commercial real estate and can be traded just like any other share. The wide variety of A-REITs available, the large asset diversification generally within each A-REIT, and their high level of liquidity are strong positives.
Whilst each A-REIT generally offers exposure to a number of properties in the one investment, these can change over time as the manager looks to improve the portfolio, so the properties in the trust at the time you purchase may change.
A-REITs are market traded and just like any other share the move with market sentiment, so their price does not necessarily reflect the underlying value of the property assets or any change in value of the assets. These market movements can also cause the value of your investment to be significantly more volatile than a direct investment in property.
Another issue that came to the fore during the Global Financial Crisis is that many A-REITs are not simply property investments, but are ‘stapled’ to a management company, meaning that when you purchase most A-REITs you are buying both commercial properties and a business. This can sometimes be a positive or sometimes a negative but it certainly the dynamic and risk profile of your investment.
Unlisted Property Trusts
Unlisted property trusts provide an investment with characteristics most like a direct property purchase of a commercial property, with the added benefit of professional management.
As unlisted property trusts are generally price based on the underlying valuation of their property assets, their price volatility is a lot lower than A-REITs and you know that the value of your investment is more influenced by movements in the commercial property market rather than by the broader share market.