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The commercial pivot: Don’t put all your eggs in one basket
As more investors explore commercial property, seeking higher yields, the ability to invest in multiple assets through a fund can maximise returns and enable fewer risks.
Following the federal tax changes, investors have been turning to commercial property for higher income yields and greater diversification.
According to Westbridge Funds Management executive chairman, Damian Collins, many investors were strategically syndicating commercial investments through property funds, allowing them to spread their capital across several assets.
“Since the tax changes, more and more people are looking at commercial and going, ‘yeah, I’d rather spread my risk around multiple assets than have all my eggs in one basket’,” he said.
He said that, rather than buying a property outright, investors can buy an ownership stake in a fund and receive a proportionate amount of income and capital growth from multiple assets.
Collins said investors can invest in commercial real estate through a listed fund on a public exchange, such as the ASX, or in unlisted funds, which are usually accessed through fund managers.
However, before committing to an unlisted fund, Collins said investors needed to conduct due diligence and research to find the right fund manager and avoid a bad investment decision.
Here’s what investors need to know:
Opportunities for specialised or broad assets
Collins said that syndicated investments through funds gave investors exposure to high-quality assets that might otherwise be out of reach.
He said investors could invest in syndicates targeting medical asset funds.
“Medical is a space where people still generally go and spend that money regardless of economic conditions,” he said.
“On top of that we’ve got an aging population, and the growth in medical services means that spending on the medical space is growing at five per cent per annum, compared to general GDP lower than that.”
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On the other hand, he said there were also broadly diversified funds, which didn’t have any limits and provided the opportunity to invest in the right assets at the right time.
“That way, you’re really trusting the fund manager more because they’ve got the ability, generally, to go and buy any asset class, and they’re not limited to a medical or industrial thematic sector,” he said.
“You then really just have that confidence that they’re building out a good quality portfolio based on their track records.”
Minimising vacancy risk
Collins added that by investing in multiple assets through a fund, investors faced fewer serviceability constraints and cash flow pressure if one property became vacant.
“I’ve got some older ones that I do own directly, but I now have a property that’s vacant – it’s going to take me eight months to lease up,” he said.
“If you’re concentrated in that one asset and getting no income, that can be problematic for your banking requirements.”
Collins said that banks nowadays assessed loans more frequently and increasingly from a cash flow perspective, and investing in funds added extra security.
“In the commercial world, the tenant is critical because if they go out of business or they’re not there or they don’t renew their lease, you could be up for a long vacancy period,” he said.
Choosing an asset type and fund manager
Before diving in, Collins said investors should consider the asset type they wanted to invest in, whether specialised or broad, as each asset type has its own benefits.
“Or even, is it a single asset fund? Then you want to make sure you’re comfortable with that particular tenant or tenancies in that single asset fund,” he said.
Collins said that for any fund, investors needed to assess value, demand, and rents, rather than simply relying on diversification.
Next, he said investors considering an unlisted fund should do their due diligence and research the fund manager in charge.
“Who is running the property syndicate or the property fund? What’s their track record? How long have they been around? Who are the people behind it?”
Investors should then ensure the fund manager had the capability to make the right purchasing decisions, and weren’t simply going out and buying anything.
“If you’ve got a broad spectrum of assets across sectors and a good quality manager, it’s less likely to all go pear-shaped… But it is not risk-free, and people need to be aware of that,” Collins said.
Listen to the full episode here
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