INVESTING IN COMMERCIAL PROPERTY
By Thomas Murrell, MBA, APS
Investing in commercial property is well beyond the financial means of most people. Few can afford the large sums of money involved in buying commercial real estate. For most of us our investment in real estate is limited to where we live – our home.
But unfortunately our home doesn‟t generate any income or cash flow. In fact it probably costs us money in maintenance, rates and upkeep.
Sure the financial incentive to invest in your own home is to offset the cost of renting or the capital gains you get when you sell your house if it‟s value has gone up.
Most financial advisors will tell you the best investment strategy is to pay off your home mortgage as quickly as possible to reduce your debt.
But what about after that if you want to invest in property? You have a choice – invest
in another residential property or a commercial property.
Residential properties can often provide a good cash flow from rent, but there are associated hassles with getting good tenants, poor tenants trashing your property and the ongoing cost of maintenance. If you like playing the role of the landlord and being involved in all those activities great! But what if you want a hassle free commercial property professionally managed.
An increasingly popular investment amongst smaller investors and retirees is through syndicated property trusts. This is known as direct property investment where smaller investors buy small parcels of a larger property through a prospectus. These projects are managed and marketed by licensed property dealers.
The prospectus is lodged with the Australian Securities and Investment Commission and the property and syndicate is professionally managed.
As of December 1999 there were 77 Property Syndicates operating in Australia with more than $1.45 billion invested. Nearly 60 per cent of these investments use borrowed money, known as “gearing”.
The benefits for investors buying into property syndicates is they can purchase relatively small parcels, for example as little as $10,000 and gain exposure to the commercial property market.
There is also the added benefit of the commercial property market often being in negative correlation with the share market so investors can spread their risk across their portfolio.
Another benefit provided is the regular income provided by syndicated property trusts, high yields and relatively low risk.
A typical breakdown of a property syndicate is the property management company buys a commercial building ranging from between $10 to $30 million and then they market this to around 300 individual investors who each have an equity subscription of between $40,000 and $50,000 each.
Simon Toovey is the Managing Director of Glenmont Properties a Perth-based property syndicate.
He says their main objective is to invest in properties that have quality tenants, long-term leases, strong returns and good potential for capital growth.
“The benefits of investing in a property syndicate are that it can enhance your lifestyle
by providing a regular income, you can set and forget it,” he said.
Toovey gives the example of a typical investor profile of someone looking for secure, regular income rather than capital growth.
„The most important aspects are location, lease, tenant and management. It‟s no good having a lease when the tenant holding that lease is a $2 company. Ideally the tenant is either a government department or a major, “blue chip” corporation,” he said.
“Ultimately, it‟s all about income. The right property investment should provide you
with more income, income that will enhance your lifestyle, either now or in the future.”
Property syndicates may not be for all investors but they do provide an option for diversifying your investment portfolio.
Ten Tips for First Time Property Syndicate Investors
1. Set your objectives and work out a budget for how much you want to invest.
2. Understand the risk/reward tradeoff. The higher the return the higher the risk. Aim
for syndicates with a return of between 8 and 10 per cent.
3. Understand the risks of property syndicates. These are a potentially unfavorable
market when selling, rising interest rates, member liabilities and future potential
4. Remember this is a long-term investment, usually around 7 years. It is “illiquid”;
meaning you can‟t take your money out of the investment during this time.
5. Identify investment syndicates with quality property in a good location with
potential for capital growth. Ask for a copy of any independent investment and
6. Analyze the lease arrangement. Ask how much rent or income will the property
produce, what the income growth is and how long will this continue?
7. Look at the quality of the tenant. Ideally it should be a government department or
well established “blue chip” corporation.
8. Investigate the quality of management running the property syndicate. They must
have a proven track record of managing properties and have a good relationship
with the tenants. Ask what are their qualifications and how big is the portfolio of
properties they manage? The individual advising you on the investment must also
hold a Security Dealers License, or an Investment Advisors License, or be a
Proper Authority Holder who is an Authorized Representative of a License
9. Beware of excessive management and marketing fees. Read the fine print in the
prospectus on these costs.
10. Seek professional advice from a qualified stockbroker or financial planner.