Direct Investment vs Unlisted Property Trust

Direct investment in commercial real estate or unlisted property trust? Both options have their advantages and their considerations, and understanding them both will really help you make an informed decision that matches your investment goals.

In this post, we explore the pros and cons of investing directly in commercial property versus investing through an unlisted property trust, so you can decide which is the most suitable path for your investment journey.

Investing directly in commercial real estate

Investing directly in commercial properties can suit investors for a few reasons:

1. Control and decision-making

Direct investment means only your hands are on the wheel, driving your investment. You have complete control over property selection, management and decision-making. You’ve got the freedom to choose the specific properties you want to invest in and have a direct say in how they are managed and operated.

(That said, this can also be a con for investing alone – because almost ever task required for successful property investment is directly your responsibility.)

2. Potentially less fees

Direct investment obviously means you won’t be paying an establishment fee or management fee (like you might when joining a commercial property trust). By managing the property yourself, the only fees you’ll have to worry about are leasing agent fees, advertising fees, solicitor fees, and the like.

But keep in mind, unlisted property trusts aim to ‘reimburse’ the fees they charge by providing better-than-average returns.

3. Customisation and diversification

Direct investment allows you to customise your portfolio according to your appetite and risk tolerance. You can choose properties from different sectors, locations and sizes to diversify your holdings and mitigate risk.

But of course, investing directly in commercial properties also comes with challenges:

1. Capital requirement and less diversification potential

Direct investment in commercial properties typically requires a substantial amount of capital, far more than what’s required in an unlisted property trust. Acquiring properties, managing expenses, and dealing with potential vacancies or maintenance costs can be financially demanding.

Due to the high entrance costs, many investors will put all their eggs in one basket by investing directly in commercial property, because they have little capital remaining to diversify by investing elsewhere.

2. Constant active involvement

Managing commercial properties requires a huge amount of time, effort and expertise. You need to handle tenant relations, property maintenance, lease agreements, and a range of unique operational aspects that sees most inexperienced investors wish they’d partnered with experts.

If you lack experience or the ability to devote sufficient time, you might consider a set and forget investment in an unlisted property trust.

Investing in an Unlisted Property Trust

An alternative option for commercial property investment is investing through an unlisted property trust. Here are some advantages if that’s the route you take:

1. Expert management

By investing in an unlisted property trust, you benefit from professional management provided by experienced fund managers. These experts handle property selection, acquisition, management and administration, saving you the time and effort associated with direct involvement.

They’ll also likely have a history of performance that you can review, giving you peace of mind when you part with your hard-earned capital.

2. Access to a diversified portfolio

Investing through an unlisted property trust allows you to gain exposure to a diversified portfolio of commercial properties. You might invest across retail, industrial and office premises, and the locations might be spread from Perth to Sydney.

3. Lower barrier to entry

Investing in an unlisted property trust usually requires a far lower initial capital investment compared to direct ownership. You only need to foot the bill for a portion of the commercial asset, as opposed to the entire thing. This opens doors to a wider range of investors who may not have the resources to acquire individual properties.

Nevertheless, investing through an unlisted property trust also has some considerations to keep in mind:

1. Limited control

By investing in a trust, you give up direct control over property selection and management decisions. Fund managers make these determinations on your behalf, which may not align precisely with your preferences. You also might be unable to remove your investment funds at a moment’s notice.

But commercial property is for players of the long-game, and you should expect your funds will be tied up for a few years or more. For the patient investor, illiquid investments like this can have excellent advantages.

2. Reserved (sometimes) for sophisticated investors

Because commercial real estate investment can be complex, some unlisted property trusts require their investors to have experience investing in assets of this calibre. This is usually in order to satisfy their Australian Financial Services License (AFSL). Sophisticated investors have a few hoops to jump through before being certified as “sophisticated”. Read more sophisticated investors here.

Choosing how to invest in commercial real estate

Deciding whether to invest directly in commercial properties or through an unlisted property trust requires careful consideration of your investment objectives, available resources and personal preferences.

Do you have the time to invest alone? Do you have the capital? Are you confident enough in your own expertise to successfully make a commercial property investment work?

If no, then an unlisted property trust could be for you.

Investing through an unlisted property trust means you’ll leverage professional management, be able to diversify your portfolio and lower the barriers to entry.

Weigh up these factors, so you can make an informed decision that aligns with your investment goals and risk tolerance. And of course, speak to your financial consultant or accountant before making any major investment decisions. Because commercial real estate can be a complex investment…

But, as us and our investors have found, it’s also one of the safest ways to dramatically increase the size of your bank account.

Want to know more? Get in touch today to find out what opportunities we have available for new investors.

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