Smart ways to invest in commercial property

With some residential markets running hot, including Sydney, and some sectors oversupplied, such as Melbourne apartments, it's not a bad time for real estate investors to investigate commercial real estate.

There are various ways to invest in the commercial real estate esector apart from actually buying a shop, warehouse or office unit; or outlaying a huge amount of money.

You can get some exposure by buying Australian real estate investment trusts (A-REITs) on the ASX.

They generally invest in large office blocks, shopping centres and industrial complexes and most revenue is from rentals, the bulk of which they pay to investors as dividends. But they are affected by sharemarket volatility and are not pure property investments.

For direct exposure you can invest through unlisted funds. But beware: some have not performed to expectations, so you must spend time researching before buying.

A good place to start is Property Investment Research, which gives free access to reports on new unlisted funds. Not all funds are rated.

The Property Funds Association is another place to find out about new funds and smaller property syndicates by hot-linking from the member list.

Unlisted funds range from the Charter Hall Direct Property Fund (CHDPF), which has a $470 million portfolio of office buildings in major CBDs, to ones that own individual properties, such as the Charter Hall Direct VA Trust, which is investing in a $66 million office building on the fringe of the Brisbane CBD.

The advantage of investing this way is the lower entry cost. CHDPF's minimum investment is $10,000 with further investments allowable in multiples of $1000.

It is an open-ended fund that aims for sustainable and stable tax-advantaged income and capital growth potential. This type of fund suits medium- to longer-term investors.

The single-asset fund is a syndicate which closes when fully subscribed.

The minimum investment is $50,000 for at least six years.

Property Investment Research says it "suits investors seeking access to a high-yielding income stream (9% yield predicted) with potential for capital growth and who are comfortable with the risk associated with a geared vehicle (expected to be 45%) backed by an A-grade office asset in the Brisbane CBD fringe".

Commercial real estate has advantages over residential, including longer leases (usually three years-plus, against six to 12 months) and higher rental yields (7% to 8% against 4% to 5%).

As well, commercial tenants, rather than landlords, usually pay most of the outgoings, such as council rates, insurance and repairs. On the downside, it can be harder to secure tenants, and properties may be vacant for some time.

If you do decide to invest in unlisted funds, do your research:

• Check out the track record of the fund manager and stick to those with a sound history.
• Check out the redemption policy of each fund. With some, such as closed syndicates, you will be locked in for several years.
• Understand that funds investing in a single asset carry more risk than those that invest in a portfolio of properties.
• Check that the gearing levels are not uncomfortably high for you.
• If income is important, choose funds with regular distributions.

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