Three ways to invest in commercial property in Australia

There's more to the property market than residential housing, and an investment in commercial property can bring valuable diversity to a portfolio. Here's how to get involved.

Commercial property has a long-standing reputation for delivering higher rental yields and longer leases than residential property.

This can make it a useful asset class to add to your investment portfolio, especially if you're looking for regular income.

If that sounds like you, one of the advantages of commercial property is the variety of ways to invest. Here's a look at three of the main options.

1. Buy directly

As with the residential market, it's possible to buy your own commercial property, and many are listed on the commercial arms of real estate selling sites.

The potential good news for prospective buyers at present is that the latest Raine & Horne Commercial Insights report suggests that the commercial property market is likely to benefit from lower inflation and the recent interest rate reductions.

Digging down, the report predicts that retail property - which has been hardest hit by cost-of-living pressures - will rebound from its recent slump as consumer spending picks up.

Meanwhile, the industrial sector - which has enjoyed a period of strength in recent years - is forecast to continue to see values rise as the supply of properties remains constrained.

There are downsides to buying commercial property directly - at least, when compared to purchasing residential property.

Loans for commercial properties tend to come with higher deposit requirements and interest rates than residential loans. That's why it may pay to shop around among different lenders.

2. A-REITs

If you have limited capital to invest, an A-REIT (Australian Real Estate Investment Trust) could offer a comparatively quick and easy way to invest indirectly in commercial property.

As Thomas Daykin, a senior financial advisor at ActOn Wealth explains, REITs are essentially managed funds that own property. Just like shares or ETFs, they are listed on the stock exchange.

"Instead of buying a whole property, you can pool your money together with other investors and each own a small slice of a big property portfolio that is purchased and managed by the fund manager.

"These property types will typically include office buildings, shopping centres, warehouses, apartment complexes, hotels and retirement villages.

Daykin says that REITs are designed to pay out the majority of their rental income to investors, which typically happens on a quarterly basis.

"The REIT collects rent from tenants of the properties and sends a portion of that money to you, the investor. Beyond that, if the value of the properties increases over time, the value of the REIT can go up too, and you could sell your stake on the share market for a profit."

The beauty of A-REITs is that investors can buy in with as little as $500 - the minimum marketable parcel on the sharemarket - which makes them a relatively affordable way to access commercial property.

On the downside, as a listed investment, the value of A-REITs can be impacted by market shocks. This happened in 2020 during the early stages of the pandemic when the value of many REITs plunged.

Fortunately, A-REITs have since recovered. For instance, since reaching a recent low point in October 2023, the S&P/ASX 200 A-REIT Index has risen by more than 50%.

3. Unlisted trusts or funds

A third option is to invest in an unlisted property fund. These are offered directly to the public by funds management companies.

"Because these funds aren't listed on the share market, their value doesn't rise and fall every day like a REIT or ordinary shares. This might be appealing for investors who prefer investments that are based on actual performance and valuation, instead of investor and market sentiment," Daykin explains.

Like their listed cousins, unlisted funds typically pay out regular distributions. The downside is that upfront capital requirements are generally higher and it can take longer to pull money out.

"The trade-off is the lock-in periods. Your money will be tied up for several years so they're obviously much less liquid than REITS or shares, which can be sold at a moments noticed via your trading platform," says Daykin.

"Again, like any other property investment, they carry the same risk as REITs, property values can fall, tenants can leave and returns aren't guaranteed.

Ultimately, like any investment, this is why it can be important to compare funds, read the fine print and understand what you're putting your money into.

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