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An Investment Revolution: Why Australia is shifting to commercial property

Categories: Commercial, Investments, Superannuation

When investments consistently underperform or are overly risky, investors tend to look elsewhere for returns. Traditional investments have been letting down Australians for too long, so they’re shifting toward an investment with high yields and lower risk: commercial property.

Australia is seeing an investment revolution. Something akin to the post-1990s recession period, which saw a deflated Aussie economy (finding its feet after a different investment revolution – deregulation) rebound in spades from a resurgence in investment.

So, what’s this investment revolution all about?

Residential property, shares, default super funds, term deposits and Australian government bonds are staple investments for most. But another common factor they share is that Australian investors are shifting away from them in droves.

Poor performance and investment environments are the culprits for the exodus. And the substitute investment for dismayed investors is one that’s been a standout performer – commercial property.

Here’s the case for commercial property investment.

Inspiring an investment revolution

Traditional investments have been providing low returns and high risk.

Super funds are disappointing many employees. “No-frills” superannuation funds, forming a $700 billion segment of the super industry and the default fund for most workplaces, are handing out returns as low as 5 per cent.

The stock market has been performing reasonably – well, except for the $63 billion that was wiped from it on August 15 – and yet super funds that heavily rely on investment in it are underperforming.

Meanwhile, deposit balances are frozen in a low interest rate environment. 10-year Australian government bonds are also as stiff as a board, conceding sub-1 per cent yields (down from 2.7 per cent a year ago).

And as anyone within 20 metres of a newspaper in the last 6 months would know, Australian residential property is as dull as a Melbourne winter. Yields are miniscule between 1 and 3 per cent and values have plummeted.

(Some say today’s grim residential property market casts a shadow over house values in that same 1990s recession. Back then, a new liberalised financial system paved way for defaulted loans and overvalued property prices. Lowering interest rates thankfully brought the economy back to life when investors snapped out of their funk.)

Residential property investment versus commercial property investment.

Residential property has been a dull performer for investors, with some commentators saying the market is performing worse than it had during Australia’s last recession.

Oh, and shares are still as volatile as ever. Did we mention that $63 billion was wiped from the… yep, we did.

As a result of the rough environments, those parking cash in the above investment avenues have marched into a new neighbourhood in the upper part of town.

A “purple patch” for commercial property

Commercial property has long been misunderstood. Many average investors have thought of it as an investment vehicle reserved only for the rich and the experts.

But now, Jane and Joe Blogs are ditching the traditional investment classes – long the producers of low yields and frustration – and shifting toward commercial real estate investment.

“It’s all about interest rates. Investors are finding it very hard to get an adequate return from their bank deposits and so they are very interested in relatively low volatility syndicated commercial real estate exposures that have got good yield,” says Mark Steinert, managing director of Stockland, in a July interview with the AFR.

“If you buy into a syndicate that might have 50 per cent leverage, with debt levels so low, those yields on the syndicates are typically well over 7 per cent, which is quite attractive to a private investor.”

Commercial property lacks the volatility of shares, because a commercial property is a long-term investment; unlike stocks, which are an ease to trade at the drop of a hat.

And while typical investments are providing inadequate returns, commercial property yields are generally between 5 to 7 per cent (and sometimes higher if the asset is purchased and managed well) … and that doesn’t include the capital growth opportunities.

President of the Property Funds Association, Steven Bennett, also recognises the renewed popularity of commercial property investment, in a time labelled by the AFR as a ’purple patch’ for unlisted property funds and syndicates.

“This investment trend has been building for a number of years, first due to declining returns and capital growth in the residential property market and more recently as a result of the record lows in Australian government bond yields and term deposits,” Mr Bennett says.

How can you join the revolution?

Self-managed super funds (SMSFs) are about as popular as ever. These funds, mostly operated by those in or nearing retirement, are looking for investment vehicles with high yields and high potential for capital growth. Afterall, these SMSFs house their members’ nest eggs.

And that’s what commercial property allows them.

Typical yields from commercial property investment range between 5 and 7 per cent (and sometimes higher if the asset is purchased and managed well).

Individuals are joining the cause for better returns, too. Many first timers are joining the ranks of Australia’s investment elite (we’re looking at you, Baby Boomers) and investing in small commercial assets under the million-dollar mark. Others are finding comfort in a “joint effort” of investing, in syndicates.

Commercial property syndicates are booming in popularity. Why? Investors can access multi-million-dollar property investments with a modest amount of capital, they can leverage the existing networks of experts, and they can minimise risk by having professional experience and knowledge at their fingertips.

While returns from classic investment avenues have become dull, commercial property has inspired an investment revolution.

For more information on how you can invest alongside a professional and structured commercial property syndicate, get in touch with Properties & Pathways today. We prosper with you. Just ask our investors. Over 83% have reinvested alongside us.