Commercial Property: Why It Should Be in Your Investment Portfolio

Our next speaker is Steve Bennett, Direct CEO at Charter Hall, Australia's leading fully integrated, diversified property investment and funds management group with over $84 billion of funds under management.

Steve oversees approximately $9 billion of unlisted property funds across all core real estate sectors on behalf of self-managed super funds, family offices, high net worth and direct investors.

Today, Steve will be sharing his insights on the role that commercial property plays within a diversified investment portfolio.

Welcome, Steve.

Happy to hand over to you.

Look forward to hearing what you say.

Thank you very much, Darren.

And I might start at this short video by explaining what exactly is meant by commercial property investment.

Many people are familiar with the residential sector and how you can invest into that.

An area where people don't necessarily realize is that they can invest into large office towers, Woolworths, neighborhood shopping centers,

industrial centres, data centre properties and the aim of this is to provide access to high net wealth and retail investors to that same high quality institutional grade property that many people don't know they're allowed to go into.

There are typically three ways individuals, high net wealth investors and self managed super funds can access this institutional quality property in Australia.

The first is through unlisted property funds.

This is a big focus of Charter Hall in the team that I look after.

The second is into listed A REITs, so Australian Real Estate Investment Trusts, such as Charter Hall, we're the manager, but we also have a social infrastructure REIT, a retail REIT, and a diversified REIT.

And the third way, probably the one people are most aware of, they can buy a small warehouse or a shop in their own name.

I often get asked, well, why would I go through a group like Charter Hall instead of purchasing the asset myself?

Well, there are a number of reasons and let's start with the most obvious one around diversification.

It's very hard to diversify your own investment portfolio, typically due to the scale and capital you've got to deploy.

Whereas what we can do is we can pull a whole bunch of investors capital and provide access to that same high quality real estate, but spread it over multiple assets in different states and locations throughout the country.

The second thing to note is that typically unlisted property does have lower volatility than other asset classes.

The returns are heavily favoured towards income, and we know, having been doing this for a very, very long time, that many of our clients do rely on that monthly or quarterly income that we pay through our distributions to support them in retirement or through their way of life.

It's very common to be able to pull out an eight to 10% total return from high quality core real estate over the long term.

A lesser known area and benefit of unlisted property funds is something called tax deferred.

It means things such as amortization and depreciation effectively shield some of that monthly or quarterly income, meaning you don't pay tax on it in the year that you receive it.

It's then converted through lower cost base and you get favorable CGT treatment upon exit.

And finally, and sometimes this is missed, that commercial property does take quite a bit of time and expertise to manage.

At Charter Hall, we bring together more than 600 real estate professionals.

We have deep relationships with many of the largest tenant customers in Australia.

And we have people whose sole job it is to manage and create value and drive higher cash flows and valuations as their job.

People do often underestimate how intensive and difficult it can be to manage this type of investment class yourself.

The final thing I get asked is, well, is now a good time to invest into this sector?

Well, obviously, I can't provide financial advice, and we always encourage people to speak to their financial advisor or stockbroker.

But what I can say is that the current climate is arguably very favorable for this type of investment.

We've got very strong population growth.

We've got limited supply coming through, not just in residential, but supply challenges across all the core real estate sectors, such as office, industrial, convenience, retail, like I mentioned before.

We've had interest rates that have not only peaked, but we've seen a couple of interest rate cuts already.

So if you put this demand which is growing and the supply which is falling, we believe at this point in the cycle, you're coming in at a great time to get some outsized returns from core real estate without materially having to move up the risk curve into things such as development and asset positioning.

There are some other things to consider if you are looking at an unlisted property fund.

How does it fit into your portfolio construction?

So there are different advantages and disadvantages of unlisted versus listed real estate.

Listed real estate provides the advantage of daily liquidity, but it does come with more volatility.

Unlisted funds, the unit prices and values tend to be more stable, but you do need to be aware that your capital is typically invested for three to five years.

You should do some research on the manager.

Do they have a long track record?

Do they have experts located on the ground where the assets are?

You should always speak with your financial advisor and read the offer documents in full.

And the other thing I would say is that it should be considered as a long-term investment, whether it is through the listed market or through unlisted property, whether it's your own home or investment property in your own name,

or an institutionally managed fund like Charter Hall provides, it should be considered part of your illiquid pool that you invest in for a period of time.

We're very pleased to have our funds available on the investment markets platform, including our newest offering, a market leading convenience retail fund.

You can also invest across any other property sector through our funds such as an office fund, industrial and logistics portfolios, as well as a diversified fund

if you want someone like Charter Hall to mix and match the asset allocations for you.

Thanks for those insights, Steve.

What is the current outlook for commercial property in Australia?

I think you're coming into a very favourable period for commercial property.

We manage a lot of the capital for big institutional investors, such as large super funds, offshore pension funds, sovereign wealth funds, and they are looking at Australian commercial property at this time.

That's a great entry point.

You've had a couple of years of challenging valuations in a period of escalating interest rates.

but that's now behind us.

What they're looking at is saying this is a great entry point at this time in the cycle where you can get outsized returns but without taking on those outsized risks that you typically would have to.

Are there any particular sectors, Steve, that you think are more attractive than others at this particular point?

That's a tricky one, Darren.

We are invested into all the core real estate sectors.

We do think that we want to provide the best opportunities and let investors and their advisors make the decision.

What I would say, the convenience retail sector is particularly shining at the moment.

We've raised around $2 billion from some of the largest investors in the world.

And we've also created a sleeve that makes this same exact portfolio available to our high net wealth clients.

So we do feel that this super defensive core real estate, think of your Coles or Woolworths anchored neighborhood shopping centers or a Bunnings warehouse, it's a great time to invest into that part of the market.

Now, Steve, Charter Hall has a longstanding track record of being obviously a very effective and well-known commercial property manager.

What should investors look for when they look for a manager for their own capital?

If you're looking at any manager, whether you're talking equities, bonds, or in this case, real estate, look at the offer documents, and whilst track record is not a guide to future performance, we've all read that disclaimer, have a look at if they've delivered on those investment mandates.

Have they stayed true to label?

Have they invested into the assets that they said they would?

Have they provided that exit opportunity for investors at the scheduled time?

Look at the resourcing.

Real estate, you really need to have people located on the ground if you want to drive value.

You need to have relationships with the tenants, the leasing agents, the sales agents, and really know what's happening in that market.

And finally, an often overlooked area is around the level of gearing.

I could increase the returns of all my funds, particularly at this point in the cycle, by adding more debt into it.

However, at Charterhall, we feel a typical gearing range of that 30% to 45% is an appropriate level.

As you move up higher in that gearing level, yes, returns should be higher, but investors do need to understand that it comes with a commensurate increase in risk profile.

Thank you very much for your insights today, Steve.

Very much appreciated.

Thanks, Darren.