What is a commercial property trust?
When looking to purchase a commercial property, investors generally have two main options: buying the commercial asset directly themselves, or pooling their money together with other investors. For the majority of investors, buying and managing a commercial property individually is not a financially viable option. Even if it is, putting a significant portion of their funds in one investment can pose greater risk, particularly if they don’t have the experience and expertise to identify, secure and manage a good commercial investment. For this reason, many investors are choosing to allocate their funds into a commercial property trust.
A commercial property trust is a form of property investment whereby investors buy a share of a commercial asset (or assets) held in a professionally managed unit trust. Rather than investing in a commercial property individually, a number of investors pool their capital together to purchase a property or group of properties which are then managed by a professional asset management team. The individual contribution that each investor makes will represent their share in the asset. For example, if a group of investors purchase a neighbourhood shopping centre worth $15 million and gear the asset to 50%, they would require $7.5 million in upfront equity (without accounting for additional acquisition fees). Rather than one individual raising all this equity for the asset, you might get a number of investors contributing $50,000 or more for a share in the property. If an investor were to contribute $750,000 towards the $7.5 million deposit, they would then own 10% of the asset, meaning they would receive 10% of the income distribution from the property as well as 10% of any capital appreciation upon sale.
Benefits of commercial property trusts
Affordable entry into the commercial property – For the majority of individuals, investing in a commercial property directly isn’t a financially feasible option, especially when searching for a high quality asset. Commercial property trusts give investors the opportunity to enter the commercial property market without the large deposits typically required to purchase a commercial asset directly. By investing in a commercial property trust with others, investors also have the opportunity and means to access a higher quality property that they otherwise may not be able to afford on their own.
Professional asset management – Investing in real estate can be a time-consuming and often difficult venture for time-poor investors, and one that requires sophisticated knowledge of the market as well as regular management. Contrary to joint ventures or direct ownership, whereby investors are responsible for the management of the commercial assets in their control, commercial property trusts will typically assign a professional asset manager who will take care of these items on investors’ behalf. These asset managers aren’t just responsible for the daily management of the property itself, but can also be invaluable in guiding the strategy surrounding the acquisition and long-term potential of the asset. This can include key strategic elements such as ensuring the properties have a strong, diversified tenancy mix that holds appeal for a diverse range of industry tenants, as well as monitoring industry trends and identifying value-add opportunities to increase the asset’s long-term growth potential. This knowledge of industry trends is particularly important in today’s evolving market, with modern technologies such as automation and online retail driving changes across the retail and industrial sectors.
Identification of excellent investment opportunities – Identifying and purchasing a high quality commercial investment can be a difficult feat for the individual investor, and will often require constant monitoring of investment opportunities as well as an in-depth understanding of the negotiation process. With commercial property trusts, the trust’s acquisitions team are responsible for the purchase of the property, and will play a pivotal role in identifying and securing key investment opportunities. As full-time professionals in the commercial industry, they will often have access to additional resources and market contacts that simply aren’t accessible for the typical investor, such as off-market deals, potentially opening up a wider range of excellent investment opportunities for investors. A strong acquisitions team will also provide the expertise required to negotiate a good deal on the property or, as the case may be, to spot a deal that is too-good-to-be-true or holds “hidden” flaws that could impact the property’s value or income-producing potential further down the line. This can be a key factor in mitigating the risk involved for investors in the trust.
Diversification – As with any type of investment, commercial property investment carries risks. Commercial investors always face the possibility of unforeseen circumstances such as tenants leaving or going out of business, but this risk can be even greater for investors who opt to purchase a single asset directly. Diversification into different asset classes and industries is a strong investment strategy for those looking to protect their capital and boost the growth potential of their investment, but can be hard to achieve for investors opting to purchase a high-cost asset directly. This is often seen as one of the biggest benefits of investing in a commercial trust; because investing in a trust typically requires a smaller amount of capital, this often allows investors to spread their capital across multiple assets and industries, hence mitigating the risk of hedging all their bets on one asset class. Commercial property trusts themselves can also comprise multiple assets, providing additional diversification across different industries and boosting growth potential should one particular industry experience an upturn.
If you would like to find out more about commercial investment and the commercial landscape in Australia, visit our sister company Mair Property Funds for the latest articles and updates on the commercial sector.