Which is the better investment – shares or commercial property? Here are our thoughts.
People pick sides. Some rave about their Mercedes C300 while others stand by an Audi A4. Some golfers say tournaments are won with practice around the green, while others choose belting balls at the driving range. And some weight their investments toward property while other portfolios are chock full of shares.
If you saw the AFR Rich List last year, you’ll notice property investment paved the road to wealth for three of the top five richest Australians (the other two were mining and manufacturing moguls). Real estate is rife with opportunities for value-add and can be an incredibly lucrative, set-and-forget investment.
I wouldn’t say we’re biased – we’re just experienced.
History has shown us that when smartly purchased, managed and divested, commercial property investment can eclipse putting your money into shares.
Here’s some of the reasons many are picking the side of commercial property over shares:
- A solid history of performance
- Trust and transparency
- Opportunities to add value
- Income and value growth
- Ability to invest in assets of substantial value
A history of performance
We can’t deny both shares and commercial real estate may be standout performers for a period of time, before they then return to average. The two investment classes operate cyclically and are dependent on a range of complex drivers.
So, what’s been happening lately between shares and commercial property?
In its EOFY report, Savills Research showed Australian commercial property provided an average total return of 11.5 per cent for the year to June 2018. This outshined the 1 per cent return seen for the equities market.
Meanwhile, residential real estate returns have bolstered against shares in the last 10 years (Aussie stocks produced an average annual compound return of 4.3 per cent versus 8.1 per cent for bricks and mortar).
But it’s unlisted commercial property which has trumped both residential real estate and shares, with average returns of nearly 11 per cent pa since 2010.
We understand past performance isn’t always a concrete measure of future returns. But it does give us a practical indicator to work with.
Trust and transparency
Comfort. It’s what most investors crave – particularly those diversifying into new asset classes. This is where clear and transparent information flow helps investors navigate foreign investment territory.
Most savvy share investors religiously follow trends in their stock’s industry, pore over details in company announcements and have a firm understanding of company debt levels and projected returns. But at the end of the day, stock investors only hold part ownership in a company – they don’t have any influence in business operations. There is a restriction in a) what they know, and b) what they can do.
This is why many are moving to an investment they can trust.
Commercial property enables such trust. A robust due diligence investigation ahead of purchasing a property gives an investor full knowledge of the potential risks (and clear vision of the potential upsides). And as it’s a tangible investment, prospective owners have the ability to talk with tenants and see what’s really taking place on the premises.
If you’re investing alongside a syndicator, it’s important to choose one who will have skin in the game. This joint participation breeds transparency and devotedness toward the same goal – prosperity and lasting wealth.
Fighters in the corner of commercial property will push the benefits of a tangible asset. That’s because it deals a knockout blow.
Adding value is a key reason many are moving to commercial property: Signage can be improved to help boost tenant exposure; renovations and enhancements can heighten a property’s worth; and even sustainable upgrades such as solar panels can increase a premises NABERS Rating (and its price tag).
Material improvements can provide material returns.
Share investors don’t have these kinds of opportunities to add value to their investment. They can choose what companies to invest in and how much money to put in. The rest is out of their hands.
Income and value growth
Many will get into the share game for quick wins (specs), while others will for dividends (blue chips). But these two motivations to invest in shares usually have an inverse relationship:
- Speculative shares rarely pay a dividend, as they don’t have an established business from which to pay one. They are volatile stocks, which hope to exchange high risk for high return.
- Contrarily, blue chips are an established company, potentially with billion-dollar market caps – they can afford to pay you a dividend (although many have recently lost their shine).
Commercial real estate investment lends itself to both cash flow and potential for big returns. We’ve mentioned the 11 per cent pa average return for commercial real estate since 2010. This is what our completed syndicates have exceeded (which enjoyed 15 per cent average annual returns).
As for return on investment, take our strategy with the sale of Tuggerah Supa Centre in NSW as an example. We achieved 40% return in just 18 months. The final sale price of this large format retail premises was $10,800,000 in November 2017 – $3,260,000 more than we paid for it in June 2016.
Learn more about our Tuggerah story below:
Generally, the biggest hurdle of commercial property investing is getting involved in the first place. People can get started in share investing with just a few thousand dollars. How can this ease of entry be compared to buying and holding a multi-million-dollar commercial asset?
Investing with commercial property syndicates
Thanks to investment syndicators, entry into commercial property of a substantial price bracket can be done with around $200,000 – the typical bank’s minimum required deposit for a million-dollar property purchase.
The benefits of investing in a syndicate are widespread, but most important to sophisticated investors is it gives them access to investment assets of considerable size and value.
At the end of the day, successful commercial property investment requires an understanding of complex property drivers, a solid property management strategy, contacts in the industry and a sharp eye for value-add opportunities. And this comes from experience.
Participating alongside a commercial property investment syndicator is a smart way to leverage market-leading expertise to diversify your portfolio. Get in touch with Properties & Pathways to find out the rewards of sharing an investment with experienced investors.