Realside's three key rules for investing in property

Property can be an attractive addition to an investment portfolio. Alongside the prospect of capital appreciation over time, it can also be a source of income – an essential goal of many investors' portfolios these days.

Residential property is typically front-of-mind for property investment. However, with the average gross rental yield at 3.7%, according to CoreLogic, property prices continuing to rise dramatically, and interest rates averaging 7.5% for a variable loan, it might be time to broaden that search.

Commercial property is typically attractive at the end of the rate hiking cycle, according to Realside, and can also offer income and capital growth. It spans industrial warehouses, retail centres, and offices. But, just as with any other investment, there are rules of thumb that can mean the difference between a solid, high–quality investment and a mistake.

Intrigued?

In this episode of The Pitch, Realside Property’s Linda Rudd and Mark Vonic shared their insights into investing in this space and how they manage their properties. They also shared their three rules of thumb for investing in commercial property.

This interview was filmed on Tuesday, 2 April 2024.

Edited transcript

Can you give us an overview of commercial property and the sectors it includes?

Rudd: Commercial property encompasses all sectors. That's office, that's retail, that's industrial. And then we have alternative sectors such as build-to-rent, healthcare, storage on the office side.

Commercial property can range across everything, such as your local commercial, smaller office accommodation where you have your small to medium enterprises to the skyscrapers that lie in our city skyline. Of course, retail can be the simple cafe that's at the bottom of your street to the largest shopping centres that house multiple fashion retailers and supermarkets. And, of course, industrials is everything from logistics, warehousing to light or heavy manufacturing.

What's one of the biggest misconceptions about investing in this space?

Rudd: One of the biggest misconceptions, first of all, I'd say that it is actually easy to manage. I think a lot of investors, when or if they have the capacity, will quite often buy commercial real estate directly but it can be tough to manage. You really need to have a clear eye on your strategy. There are leasing issues, you need to find good partners, consultants, managers to work with, which is why I think it’s actually a better outcome for investors to invest via managers. That is managers with a great track record, particularly as it relates to performance or managing across the sector and the assets they are presenting.

Vonic: We think there needs to be differentiation between direct property and REITs. They behave differently even though we use the same asset class to invest capital. In the direct space, we tend to be quite specific about the assets we acquire and we come in and out of the market. With a REIT, you often find it’s an aggregation over a period of time. When there is a rebasing of values and they trade at discount to the NTA, that is very visible to the public investor. They may not appreciate that groups like us don’t necessarily have the same valuation pressures because we’ve been somewhat more circumspect in what we have acquired through the cycle.

What are three key rules that you use when you're selecting a commercial property asset to invest in?

Vonic: 

#1: It really needs to be compelling enough both for us and for the investor. So that's rule number one.

#2: Second thing is, is it going to be an asset that can perform through the cycle? Can we manage the risk? Can we execute on the strategy and what are the options? Is there a plan B and C if plan A doesn't work?

#3: Then the final point is just getting that balance right between risk and reward.

How can investors use commercial property in their portfolio? How does it work?

Rudd: Commercial property can provide an attractive income stream to investors, but also give investors access to capital growth. That is, of course, subject to asset and sector, but that's a way in which investors can really balance commercial property within its investment portfolio.

Can you share a couple of examples of properties that you've acquired in the past and how you manage them?

Vonic: We've got a couple of office assets that have exhibited 40- 80% returns on capital. These are assets that are still holding value during the current cycle and are performing through the cycle. We have an example in our industrial development business of a Brownfields asset that we bought in Perth for $17.5 million. That asset is currently on our books at $45 million, and that hasn't been as a result of yield compression or yet rental growth, it's just been old fashioned asset management. When we acquired that building, it had a net income of $700,000 per annum and was largely vacant. We understood the market well enough to split the building, create smaller leaseable spaces that we're going to find a demand in its submarket, and we now have had that income come up to over $2 million. It's an example of finding those bespoke opportunities where we can bring our own level of asset management expertise if you like.