For some, it’s easy to become excited about investing in commercial property. After all, it feels like that’s what ‘normal’ property investors do when they ‘grow up’. Less hassles from a tenant (as long as you have one), more certainty with cashflow, strong capital gains, and often far better tax treatment. What’s not to like?
If it weren’t for rather significant ‘barriers to entry’, I suspect many could be tempted consider direct commercial property investment.
Once there’s a realisation interest rates are higher though, or the loan terms are shorter (like 15 years!) and you generally need 35-50% deposit (cash or equity), dreams are dashed on the spot.
What about joining with someone else to purchase a commercial property together though? Perhaps form a syndicate with a few of you. Perhaps buy into someone else’s syndicate or even a ‘fund’.
What’s a fund you ask?
A fund is simply a pot of money sourced from investors. A fund manager is the one who makes investment decisions on behalf of the investors.
Think of it this way. Imagine setting up a company – It’s pretty easy to do this in New Zealand. Let’s say you set one up and use it to purchase an investment property through. Let’s take it further. Now imagine that same company structure owns more than one property, and more than one shareholder. You’re getting a picture of what an un-listed commercial property fund kind of looks like. In a sense, it’s a private group of people joining forces, to pool capital and engage experts on their behalf. The idea is that the level of diversification and expertise added to the mix, may in some cases though funds, reduce volatility, and increase net returns from rent and capital gain.
Investing in commercial property is extremely common for those of us who invest through KiwiSaver. Here, some of the fund you invest in provides ‘exposure’ to commercial property through publicly listed property funds, or REIT’s (Real Estate Investment Trusts) in NZ, Australia, and in other parts of the world.
A bit deeper now?
Around 4 years ago I felt a bit like a conspiracy theorist suggesting ‘change was changing’ and we’re heading towards ‘interesting times’.
Today, ‘change’ is overcome by transformation. We’re in the thick, of muddy-mudskipper-brown, interesting times.
Chickens in the money world are coming home to roost. Excessively interventionist Central Banks, ‘protected’ us from recession to deliver us unto something far more evil. Now, even my very best crystal balls are fogging up.
Lock-down infused recession would have been horrible don’t get me wrong, but now it’s hard to know how to prepare for what comes next.
It feels pretty scary out there in the financial realm right now. Then again, I’m reminded that often in the midst of market uncertainty, it always ‘feels different this time around’. It’s darker before the dawn.
Bonds traditionally provided negative correlation for shares – Shares and bonds both provide a bit of income while you own them. Shares give you significant upside but with a bit of risk, bonds give you more certainty of cashflow throughout a range of circumstances. Mix them together though, especially when looking through history, they play pretty well together to deliver a good return with far less bumps along the way. Why? Because when the economy pushes share prices higher, it often comes with inflation, so interest rates have to increase. This often brings the share markets down with or without, a recession at the same time. When shares drop, (and interest rates drop to catalyze a recovery) bond values go up.
Owning some zigs (bonds) for when you get the zags (shares), ensures you end up with a more ‘stable’ rate of return in any given period.
This may be why most ‘balanced’ investors are recommended a traditional 60/40 portfolio (60% equities and 40% bonds). As has been evidenced in 2022, bonds are not currently performing the way we perhaps thought they would. Why this is the case is something for another day, but the main question to ask here is this, could commercial property be a suitable substitute for at least some of our bond exposure?
Commercial property has far less to do with central planners, and far more to do with actual, productive businesses. Which enterprise will endure the longest?
I wouldn’t be too quick to settle on this, but it’s worth a thought.
I think commercial property is a timely topic either way though, because it appears that some investments may now be reacting to change in a way different to before. Too much monetary intervention now makes it hard to know if we should watch the free market, or Central Banks. Are things broken in financial markets, or temporarily out of order?
Want a bit more on this topic? Check out the following episode with Carl Burling, who’s fairly well known in the Auckland property space, is the CEO of Provincia. My other guest is Jack Revell, who’s in charge of identifying and managing the properties the fund owns*.
*Provincia is only open to Wholesale or Eligible investors as defined by the Financial Markets Conduct act 2013. With a wholesale investment the normal disclosure rules do not apply, so investments of this kind are not suitable for retail investors.
Wholesale investments are aimed at experienced investors that can understand the investment. As part of the application process the investor must qualify by certifying that they are wholesale and show details of their investing experience. If you’re doing due diligence on offers like this, remember to ask questions, read all documents carefully, and seek independent financial advice before you invest.