Commercial real estate comes with its robust yields and high potential for capital appreciation. But it also comes with a high price tag and usually a few fees to invest – paid to either an investment company, a management team, or both. Here’s how much it’ll cost you, and why it’s still an investment class worthy of your hard earned capital.
Investors in Australia know that whether it’s for good advice or for investing in, well, any asset class, nothing comes free. The same can be said for commercial real estate investment, which sees fees for managing the commercial asset and, for those investing with an investment company, fees for professional services.
But the good news is that returns from commercial real estate investment typically far outweigh the costs to invest. We’re talking 5% to even 7% annual yields. For investors either with a smart strategy or who are investing alongside a property company with a strong track record, this number could be even higher.
Back to the fees.
Whether investing alone or with an unlisted property trust, you will have some fees to pay. Let’s look at the typical fees to invest in Australian commercial real estate.
What is the average commercial property Management Fee?
Asset management services in Australia can typically cost anywhere between 4% to 12% of the rent of a commercial property. You’ll be paying this to have a professional manage your property:
- Handling tenant complaints or issues
- Collecting rent
- Facilitating lease negotiations on your behalf
- Launching active leasing campaigns (should the property become vacant)
There are additional fees associated with advertising for a new tenant, and these will obviously be footed by you, the landlord.
Your best bet is to build a relationship with an asset management company to ensure that they can perform to your expectations and to give you the best deal possible on managing your property or portfolio of commercial assets.
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Fees to invest with an unlisted property trust
If you choose to invest alongside a commercial real estate investment company, also known as an unlisted property trust (or property syndicate), there are fees involved with engaging their services. After all, these are professionals with hefty experience, and networks that span both long and deep. You’re not only paying for their experience, but for peace of mind, income certainty, and a set and forget investment.
Here are some of the fees you can expect.
The Establishment Fee is typically between about 3% and 5%. The Establishment Fee is calculated on the property’s purchase price, divided by the portion of ownership you (as an investor) hold in the investment.
This fee basically covers the compliance costs to establish the Syndicate (of which there are many).
But some managers of unlisted property trusts do things a little differently. And for good reason.
At Properties & Pathways, rather than taking the Establishment Fee from the rental income or from the property value, we deduct the fee from the total capital we raise. This means our investors know what return they’ll receive upfront, with no unexpected charges to erode their cash flow.
Asset Management Fee
An unlisted property trust will either have a preferred asset management company that handles their syndicated investment (in which case the above management fees are passed onto the investors), or they will manage the properties using an in-house property manager.
Many unlisted property trusts charge a fee against the asset value. The Asset Management Fee is usually between 0.5% and 1% of the property value.
But this isn’t always fair.
Charging a management fee on the value of the property sounds acceptable. But what happens if the property is vacant? There’s no rent coming in the door, but you’re still charged a management fee.
We don’t believe in that structure. We want to be on the line with the return our investors see. So, we don’t charge a management fee on the property value. We charge a 15 per cent fee on the trust’s net income.
You can see how much this saves investors in the below table.
A Success Fee is also known as a sale fee, disposal fee, or divestment fee.
The trust managers, who’ve spent a significant amount of time, energy, and company costs to ensure the right time and price to divest your property, will claim a portion of the sale price or capital gain.
The success fee will be anywhere between 1% and 3% of the sale price of the asset.
Or it might be calculated on the capital gain from the property sale (i.e. the difference between the purchase and sale amounts, minus costs) in which case you can expect about a fee of about 15% on the capital gain (in proportion to your ownership of the property).
Charging a fee this way (much like charging a management fee against the trust’s net income) keeps the trust manager accountable and pushes them to provide the best outcome for you.
A few more fees to consider before investing
Some unlisted property trusts will charge a:
- Development Fee – Covers costs to make upgrades or improvements to the premises, such as a new pylon sign (We think a smarter way is provisioning for property upgrades with a reserve fund. This way investors know exactly what income they can expect through the door tomorrow and the next day, with no surprises.)
- Performance Fee – Should the trust outperform its expected or advertised rate of return, we’ve seen certain trust managers charge a fee against the difference between the advertised and actual return.
- Exit Fee – Should you wish to get your investment capital out of the trust before the investment has ended, some trust managers will charge an exit fee. Ensure you know what this is (if there is one) before investing.
Always ensure you check every detail on the investment brochure or memorandum before committing to a commercial property investment – and always talk to your financial advisor or accountant before making any investment decisions.
A final word on commercial property investment fees
This post doesn’t cover every fee that you’ll see as a commercial property investor.
You’ll need to take into account your own financial planner’s fees, legal fees to set up any trusts, and of course the inevitable accounting fees throughout the tax year.
But again, these outlays will typically fall far below the return you’ll be making from your commercial property investment, particularly when investing smartly. Or with an industry-leading commercial real estate firm.
Properties & Pathways is a dynamic commercial property investment firm.
We handpick our properties throughout Australia to reduce risk and protect investor return. The strategy works. Our completed syndicates have provided investors an average annualised return of 19%.
For more information on investing alongside us, get in touch with us today or subscribe to our mailing list alongside hundreds of informed investors.