Three ways to invest in commercial property

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 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. We look at the three 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 latest Raine & Horne Commercial Insights report says the supply of commercial assets is tightening amid a shortage of new developments and the conversion of former commercial sites to residential dwellings.

This is not only driving commercial values higher in many parts of the country, it is a situation that Raine & Horne says could take years to resolve, giving commercial buyers the potential for capital growth.

The downside of buying directly is that loans for commercial properties can come with higher deposit requirements than residential housing.

This is where it pays to shop around. BOQ Specialist, a division of Bank of Queensland, for example, may lend up to 80% of the purchase price if you're buying as an investor.

2. A-REITs

If you have limited capital to invest, a listed property trust - or A-REIT, offers a quick and easy way to invest indirectly in commercial property.

It works in much the same way as investing in shares except that you're buying units in a listed trust. So instead of receiving dividends, ongoing income is paid out as distributions.

The beauty of A-REITs is that you can get started with as little as $500 - the minimum marketable parcel on the sharemarket, making it an affordable way to gain a stake in major properties such as large shopping centres or office blocks.

On the downside, as a listed investment, the value of A-REITs can be impacted by major shocks to the stock market.

This occurred in early 2020 when the start of the COVID-19 pandemic and border closures saw the ASX 200 A-REIT index plunge almost 50% in a matter of days.

Fortunately, A-REITs have since recovered, and over the past year have delivered total returns (capital growth plus distributions) of 18.7%.

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.

Damian Collins, Chairman of Westbridge Funds Management, explains, "Unlisted funds are a popular investment choice for those looking for a consistent income stream, while avoiding the market volatility of A-REITS and the large, individual capital outlay of direct investments."

He adds, "Property funds allow investors to pool their funds via a professional fund manager, to access higher-quality assets than they may otherwise have been able to access individually. Investors also have the opportunity to invest their capital across multiple different funds, gaining exposure to different asset classes, industries, and markets."

Unlisted funds - like their listed cousins - often pay distributions monthly making them a source of regular income. The downside is that upfront capital requirements are often higher than for A-REITs, and it can take longer to pull your money out if cash is needed urgently.

This makes important to compare between unlisted funds, and check the fine print to understand what you're putting your money into - and how easily you can redeem units.

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