Where the super-rich actually invest their money
Commercial property may be a favourite investment among the world's wealthiest, but it's more accessible than you might think.
Thanks to rising home values, plenty of Australians would make the grade as 'high net worth individuals' - people whose net wealth (including their home) totals at least $US1 million ($1.53 million).
But for serious money, it's hard to go past 'ultra-high net worth individuals' (UHNWIs). These are the elite few with net worth topping $US30 million ($46 million).
So, where do the mega-wealthy invest?
Research shows that commercial property plays a key role in the investment portfolios of the world's wealthiest people.
The 2023 Frank Knight Wealth Report confirms this. It reveals that globally, UHNWIs have one-third (32%) of their wealth tied up in their homes. But they have an even bigger chunk of their portfolio in commercial property, including:
- 21% in directly held commercial property
- 8% in commercial property funds
- 5% in listed commercial property trusts.
In total, commercial property accounts for 34% of the ultra-rich's wealth - a figure that outweighs any other asset class including shares (26%) or bonds (17%).
Why commercial property?
There are good reasons why commercial property is a favourite among the super-rich, though it can play a valuable role in portfolios more broadly.
Commercial property has traditionally offered several points of appeal to all investors - not just the very wealthy. High net yields, the potential for capital growth, and long leases that deliver greater certainty of income streams are all attractive to a wide cross-section of investors.
Commercial leases usually run for at least 3-5 years - much longer than residential tenancies. That makes sense because businesses dislike the disruption of having to relocate. For an investor, long leases are good news, providing greater certainty of rental income, and a more predictable cash flow.
However, it is the higher net yields of commercial property compared to residential property that can be especially compelling - and the key word here is 'net'.
In a commercial lease, it is common practice for the tenant to pay many of the outgoings normally paid by the landlord in a residential lease. These costs can include rates, utilities, body corporate fees and insurance.
This arrangement is a plus for an investor's cash flow. It also means that net (after costs) rental yields are usually far higher than those on residential property.
As a guide, the latest (August 2023) data from Jones Lang LaSalle confirms that nationally, prime yields currently average:
- 5.08% on industrial property
- 5.86% on office property
- 5.70% for retail property
For context, CoreLogic says yields on residential property nationally are currently 3.8%. Bear in mind this is a gross (before costs) yield, so the net yield is likely to be closer to 2.5%.
An accessible avenue into commercial property
The downside of commercial property is that the entry price is typically high for a good quality asset. Investors who buy commercial property directly can often only afford to buy one asset, effectively tying the success of their investment to the fortunes of a single business tenant.
An alternative, and more accessible way to gain access to commercial property, is through a property fund.
Unlisted property funds work by pooling the capital of like-minded investors to buy commercial properties, anything from industrial estates to office blocks, warehouse complexes, retail centres, hotels or medical suites.
A key advantage of a property fund is the large capital pool that allows the fund to invest in blue chip properties that attract high-quality tenants, often ASX-listed or national companies. Some funds have a portfolio spread across multiple commercial properties, giving investors the benefit of additional diversity within a single investment.
What's especially attractive about commercial property funds is that investors can receive regular - often monthly - distributions. In this way, a property fund allows investors to earn passive regular income, yet still with the potential for capital gains if the properties are subsequently sold at a profit.
While commercial property is a hot favourite among the world's wealthiest, you don't need to be a multi-millionaire to tap into this asset class.
Westbridge's Diversified Fund No.4, for instance, which features a blend of high-quality commercial properties spanning Victoria, Western Australia and Queensland, has a minimum initial investment of $50,000.
By building a multi-asset portfolio spread across different locations, sectors and tenancies, a property fund can offer valuable diversity and minimal vacancy rates, within the one investment. And that's a plus for all investors - from the wealthiest, to those just starting out.
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