Strong demand for commercial property from retail investors

From

Steven Bennett

There is a strong interest in commercial property as an asset class as investors seek capital gains and security, as well as income, according to Australia’s largest direct property investment fund manager, Charter Hall.

Statistics produced by Charter Hall reveal this trend, showing a rise in the number of Australians invested in listed and unlisted property trusts between 2014 and 2016 from eight per cent to 13 per cent.

These statistics were reaffirmed by a recent Charter Hall survey of its investors where 43 per cent of respondents had more than 10 per cent of their portfolio in commercial property, and of this some 24 per cent had more than a 20 per cent holding in commercial property.

Australian Tax Office figures for the self-managed super fund (SMSF) sector reinforce this trend for commercial property, with investment by fund members rising from $53.2 billion in June 2012 to $78.2 billion in March 2017, a 46.9 per cent gain.

Steven Bennett, Head of Direct Property at Charter Hall, says investors see commercial property providing stable income with a lower capital risk than other investment classes.

“The three drivers behind growing investor interest in commercial property is income; the relatively low level of risk; and capital gain driven by long leases with fixed rental growth.

“Investors can get pre-tax returns above six per cent, and when coupled with capital growth of between three and four per cent, they can be looking at a total return of more around 10 per cent which is in line with the long term average for direct property. For SMSF trustees in the pension phase this comes tax-free.”

Bennett says commercial property, like any asset class, requires investors to do their homework.

“Although commercial property is typically less volatile than the share market, investors still need to understand the investment fundamentals including projected returns, the quality of the underlying property asset, the financial strength of the tenants, the length of the lease term, and the managers track record.”

“At Charter Hall, the focus is on institutional grade property and not using excessive gearing. With our investments, debt is typically between 30 per cent and 45 per cent, depending on the individual asset.

“With unlisted property funds, there is the added attraction of all the debt being internalised. In our opinion this is a better option for SMSF trustees than a limited recourse borrowing arrangement with the complexity and administrative burden these arrangements entail,” Mr Bennett added.

Bennett adds that for SMSF trustees, the introduction on 1 July of the $1.6 million assets cap on SMSFs in the pension phase, whereby assets above this limit must transfer back to an accumulation fund and pay 15% tax, is not a “major issue”.

“SMSF trustees can simply transfer units or a portion of the units in an unlisted property fund from a pension to accumulation fund, which allows them to maintain exposure to the sector.”

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