Commercial property: the other real estate investment
If we think about investment property, most of us think residential, probably because we are more familiar with it.
But Australia has a vast commercial property sector - office buildings, retail centres and industrial complexes and the bulk is owned by investors.
"I want to invest in real estate but not houses," writes Money reader Josh. "What are my options, given I only have a few thousand dollars to get started?"
Well Josh, you do have some choices, even after ruling out direct ownership of a single asset, given your budget. According to leading commercial real estate researcher Kevin Stanley from CB Richard Ellis, things are looking up for the commercial sector, after a tough time when values fell during the global financial crisis (GFC).
Limited new building in major markets and strong employment numbers, bolstering demand for offices and warehouses, are indicators that it is now a good time to buy.
And after dropping 10%-15% in the GFC, office rentals are expected to rise in Melbourne later this year and then in Sydney, although falls are predicted in Canberra, Brisbane and particularly in Perth.
Demand for new industrial space is also growing and rentals are on the rise. Retail is having a tougher time with slow sales so Stanley expects this sector to be flat this year before starting to grow again.
Many of Australia's big commercial property as sets are owned by A-REITs (Australian Real Estate Investment Trusts), such as Westfield, which are listed on the ASX.
Undoubtedly buying shares in A-REITs is the easiest way Josh or anyone else in his position can invest in commercial real estate. But some analysts argue that by being listed A-REITs do not give a pure property exposure, as daily prices are affected as much by sharemarket sentiment as by the quality of their property assets.
Certainly buying into an unlisted trust or syndicate does give you a more direct investment and access to attractions such as regular income from rentals and capital growth from well-selected property and upgrades.
Over the 20 years to March 2009, direct property has returned about 7.5%pa with a volatility of only 4%, according to Atchison Consultants. Listed property has returned 6%pa with around 14% volatility.
But there are drawbacks to investing in commercial property.
It is not so easy to find suitable investments, particularly since supply was cut by the GFC. Also these investments can be very illiquid - many froze redemptions during the downturn - so you need to need to stay in for at least five years.
If direct investment does appeal, a good starting point is the Australian Direct Property Investment Association website (www.adpia.com.au). From here you can access members' websites - those launching new syndicates or unlisted trusts generally have details on the web.
One example is the Charter Hall Direct Industrial Fund, a new offering from the leading specialist property funds management company. This $200 million fund will acquire quality industrial properties in Sydney, Melbourne and Brisbane. Minimum investment is $10,000 and the target annualised yield for the first two years is 8.7%.
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