What kind of property should be in my investment portfolio? Charter Hall
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When considering property investment it pays to look at what the professionals do - the big industry and retail superannuation funds and institutional investment organisations such as insurance companies.
Professional investors generally allocate anywhere from 8 percent to 15 percent to property within their portfolio. These institutional investors live or die by their results – there is no room for emotion or personal preference.
So what types of property?
One sub-class of property the professionals do not typically hold is residential. Why? Because long-term average yields on residential property are generally inferior to quality investment grade real estate.
Commercial property on the other hand is able to generate distribution yields in excess of 6.50 percent for investors. The dispersed or small scale nature of residential property means the costs associated with the accumulation and management of residential property also contribute to it being viewed as a less than optimal option.
Of course dinner parties are peppered with wonderful residential success stories, but headline numbers and real rates of return can sometimes be poles apart. Residential real estate investment has high transaction costs including stamp duty, legal and agent fees, and holding costs of land tax, insurance, council/water rates, external property management, vacancies, repairs and capital gains tax.
Whilst some of these costs are also applicable to commercial property, many costs like repairs, insurance and rates are often paid for by the tenant instead and other costs are lower due to the economies of scale obtainable (such as agents fee). The other big difference is that the rents paid by commercial tenants are generally much higher as a percentage of the cost of the initial investment.
Further, the heat in the residential real estate markets in Sydney and Melbourne is showing some signs of coming off the boil. Hopefully this will allow a chance to regroup and make more considered decisions.
Professional investors typically invest in investment-grade commercial property such as offices, warehouses, hospitality and shopping centres. The term ‘investment-grade’ is critical. In short, it means high quality buildings with high quality tenants, often with long leases, which translates into strong and predictable earnings flows.
The two pathways to investment-grade commercial property are Real Estate Investment Trusts (REITS) and unlisted property trusts, also often known as ‘direct property’. Charter Hall is now one of the largest and most successful commercial property investment group’s in Australia and consistently holds up to five of the top 10 performing funds as ranked by performance in The Property Council/IPD Australian Unlisted Core Retail Property Fund Index.
Regardless of what type of property, take the time to consider the full suite of property options available and proceed with care with a trusted and well respected Manager.
Steve Bennett is fund manager for Direct Property, Charter Hall and can be contacted here.
