The investment poised for a market upswing
A diversified portfolio with exposure to commercial real estate has the potential to provide significant advantages in terms of income, risk diversification and overall portfolio resilience.
And, in today's environment of falling interest rates, the case for commercial property has strengthened.
Lower rates set to drive demand - and values - higher
With more than 25 years of experience, Centuria Capital has navigated many market cycles. We expect that recent cuts to the cash rate will support a rebound in the commercial real estate market.
Lower rates usually prompt investors to seek higher returns - and commercial property is often a first choice. This typically drives property values higher.
Rate cuts also act as an economic stimulus, driving tenant demand and rental growth.
In short, we expect the increasingly favourable macroeconomic factors to have a positive impact on the commercial property market and drive up the value of high quality and well-located properties with strong leasing profiles.
And history demonstrates that when the market cycle shifts, change comes quickly.
Commercial real estate covers diverse sectors
In a market as diverse as commercial property, the impact of lower interest rates will play out in a variety of ways. Already, the office market is experiencing a resurgence of demand as growing numbers of employees return to formal workplaces.
Rising consumer confidence is expected to support the retail property market.
An area of noteworthy potential is healthcare real estate. There are minimal listed healthcare asset owning vehicles in Australia. Yet our ageing population and greater longevity mean healthcare is a sector likely to deliver consistent, non-cyclical demand, while offering attractive medium- to long-term returns to investors.
The unique benefits of commercial real estate
More broadly, commercial real estate can offer compelling benefits.
Among them are income potential, diversification, value-add opportunities, and professional management.
These upsides are worth exploring further:
Higher income potential
Commercial property typically offers higher rental yields (6-8%) than residential real estate (3-4%). This is partly due to longer lease terms that generally feature fixed annual rental increases of between 3.0% and 4.0%, and can range from 5-10 ten years or more, providing a stable and predictable income stream.
Additionally, commercial tenants are often responsible for property expenses, such as maintenance, management, insurance and taxes, through net leases. This reduces the landlord's operating costs and increases net income.
Portfolio diversification
Along with the well-known sectors of retail, industrial and office property, the commercial property market also includes healthcare facilities, agricultural assets, student accommodation and more.
This variety gives investors the ability to select specific sectors of the commercial property market to include in their portfolios. It also gives them the opportunity to diversify across multiple sectors, which can help reduce overall portfolio risk.
Opportunities for value appreciation
Commercial real estate offers opportunities for value growth through strategic improvements, or repurposing properties to meet shifts in market demand.
These improvements can attract higher-quality tenants, increase rental rates and ultimately may boost the property's market value, improving the likelihood of investors achieving attractive returns.
The skill of a professional fund manager
While it is possible to invest in smaller commercial properties via direct ownership, the investment experience can be considerably more streamlined and rewarding when investing through an ASX-listed or unlisted commercial property fund.
These funds are managed by professionals with expertise in property selection, acquisition, management and disposal.
This professional oversight can add measurable uplift to the performance of the fund.
Why the time to invest is now
Other key benefits of a commercial property fund include access to higher-quality larger assets, yet with far lower entry points than a direct investment.
The initial capital required for an unlisted commercial property fund, for example, can be as low as $10,000 - or considerably less with an ASX-listed fund.
The key is to select the commercial property fund that best-suits your goals. Investors prioritising liquidity above yield, for instance, may want to take advantage of listed property investments and investors that do not like the volatility of the listed markets may prefer unlisted funds.
The main point is that indicators suggest the commercial property market may be headed into an upswing, making now a good time to consider adding commercial real estate to your portfolio. Of course, investors should carefully consider all of the risk and return factors involved before making any investment decisions.
Centuria Capital Group is an ASX-listed specialist investment manager with a 25-year track record of delivering a range of products and services to investors.
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