Investors overlook commercial property at their peril
GUEST OBSERVATION
Property is a critical element in the construction of any diversified investment portfolio. With characteristics such as relative capital stability, generally higher income and, by the real nature of the asset, a hedge against inflation, property can balance out the volatility experienced through equities and other riskier assets.
When retail and SMSF investors think of property however, their minds immediately turn to residential property, after all this is the asset class they are most familiar with. By not broadening their investment horizon they may run the real risk of generating too much concentration to residential property, exposing themselves to the very risks they were trying to diversify away from.
With an investment in property still an important part of an investment portfolio, investors who wish to include property exposure would do well to consider commercial property.
Investors often dismiss commercial property, believing it isn’t suitable for retail or SMSF investors because of the size of investment required, the possible lack of liquidity and the difficulties in managing a commercial property. But these concerns may be overcome by taking advantage of pooled investment vehicles, such as listed and unlisted property trusts.
Investing into a pooled property trust provides access to experienced, professional property fund managers, is no different to an equities fund. Other benefits of investing in commercial property through a managed fund include obtaining diversity of asset type and geography, a regular valuation cycle, smaller capital requirement for buy-in, greater liquidity through withdrawal facilities and a stable income from a diversified tenancy base.
With an investment in property still an important part of an investment portfolio, investors who wish to include property exposure would do well to consider commercial property.
Unlisted property funds are not subject to the share market volatility that listed funds have experienced in recent years. Instead, they exhibit performance that is in line with the underlying investment properties – which is ideally what those investors looking to property for its diversification and performance benefits are seeking.
Unlisted non-residential property in Australia, in particular, has consistently achieved investment yields of around seven percent over the past two years, providing stable and regular returns for investors. This has been at a time when other asset classes have faced headwinds such as falling interest rates and weakness in the share market.
In addition, investors can also gain exposure to individual sectors of the Australian economy through unlisted property trusts, with healthcare property a prime example. The healthcare property sector has been less volatile than other commercial property sectors over the past few years, and has outperformed all property on a one, three and five year basis, driven primarily by strong income returns.
The reason for this is that healthcare properties are relatively scarce, operate in a regulated industry and are typically leased to large, stable and well-resourced operators. The ageing Australian population and increasing need for healthcare services helps ensure high occupancy levels w to higher income yields.
The options for property investment, for retail investors and SMSF trustees alike, are greater than simply looking to residential property. By ignoring a large segment of the property market, and staying with the familiar, investors not only run the risk of investing in residential property at the top of the market, they risk losing the benefits that come from investment in a professionally managed unlisted property trust.
Ryan Banting is head of portfolio management with Australian Unity Real Estate Investment.