If you have been investing in commercial property for some time, you may have also considered diversifying your property portfolio in both location and property type. There can be advantages in doing that. Here are some ideas to help you consider the way it may work for you.’
Why Diversify Property Investment Across Asset Classes?
When you have a diverse range of property types in your investment portfolio, you reduce your risk exposure to any particular market. That is a good thing in this time of global change, when economic shifts occur due to regional and political pressures.
Control your investment outcomes by choosing properties across different sectors and property types. Some property investors prefer holding property investments for some time and will choose certain property types that are closely geared to the community, such as:
- Child care
- Service stations
- Allied health
- Fast food drive-thrus
With these classes of property, the prices are typically higher per unit of area, and the returns are lower given the specialised income streams. However, they remain a desirable property class; many buyers will specifically seek properties like those with long leases and good tenant structures.
Commercial Real Estate as a Diversification Tool
There is no correlation between the performance of commercial property and equities. This can then serve as a valuable safety net for property investors over the longer term. The typical volatility associated with investing in the share market has little to no impact on the commercial property market. Indeed, many share market investors may also choose commercial property as a safety net for their alternative investments over the longer term.
1: Uncorrelated Investment Performance
The commercial real estate market will be influenced by factors of change and churn, which are impacted by location, property type, and elements of supply and demand. But there is no correlation between the commercial real estate market and other investment vehicles or classes.
2: Local Business Sentiment
One factor to consider when selecting an investment property is the local business sentiment. Local businesses occupy commercial properties as part of their operations, so the success of companies in a region will underpin the future of the cash flow, leasing structure and market rentals.
Look around a location for property activity, particularly in the classes of office, industrial and retail. If you have a particular preference in property type, then look at the competing properties in a precinct to see what vacancy factors exist and consider why that could be the case. Consider the property types and locations that local companies would look for when leasing and operating their establishments.
3: A Hedge Against Inflation
Indexed lease structures give investors a hedge against inflation. That is why many property investors purchasing another property will take considerable interest in the lease documentation, the WALE, the rent reviews, options and quality of the lease itself.
Is it possible for one lease to be different from or better than another lease in a property? Yes, that is undoubtedly the case, and that is why a thorough lease review as part of a due diligence period in a property purchase is wise. Understand all the leases, the tenants, the differences between occupancies, and any risks that the lease documentation may expose.
4: Provides Steady Income Via Lease Payments
Examine each lease in the property to ensure that you have a complete understanding of rental escalations, reviews, and risk factors. With multi-tenanted properties, the tenancy mix can be large, so the documentation review process can take time and should involve legal professionals.
Some lease clauses contain the factor that ‘time is of the essence’. It is a legal term that refers to an action being completed by a specific date and in a particular manner. When that is the case, understanding how time-related factors impact lease choices, rental changes, and future occupancy is quite essential.
