Understanding the terminology used in property investment is crucial for making informed decisions. This section will introduce you to some of the most common terms you’ll encounter in the world of commercial property investment. Whether you’re a seasoned investor or just starting out, having a solid grasp of these terms will help you navigate the complexities of the market and make informed investment decisions.
A trust that uses pooled investor funds to buy property assets, which the trust manages for a profit. A-REITs are listed on the Australian Securities Exchange (ASX), so investors can buy and sell shares in them like any other stock.
A measure used in real estate to evaluate the return on investment of a property. It is calculated by dividing the property’s net operating income (NOI) by its current market value or purchase price. The cap rate is expressed as a percentage and helps investors understand the potential income generated by the property relative to its cost. A higher cap rate indicates a higher potential return on investment, while a lower cap rate suggests lower returns.
In an investment sense, diversification means not investing all your money in one investment, and instead investing across different asset classes (such as shares, property, bonds and private equity), and investing in different options within each asset class. This allows an investor to spread their risk and reduce the risk of the portfolio underperforming as each investment can perform differently in different market conditions. Having a variety of investments with different risks and expected returns will balance out the overall risk of a portfolio.
Also known as leverage or LVR (Loan to Valuation Ratio), is a way to measure how much of an investment is financed using borrowed money (debt) compared to the equity contributed by investors. It is essentially the balance between debt and equity in an investment.
A risk management strategy used to protect against potential losses from unexpected market movements, allowing investors to manage their exposure and maintain more stable returns. With property assets, it usually involves locking in borrowing costs at a certain interest rate over a period of time. A fund might be 50% hedged, meaning that 50% of debt outstanding will be paid at a variable rate of interest, and the remaining 50% is locked in or capped at a fixed rate of interest.
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IDPS are managed investment schemes for holding and dealing with one or more investments selected by investors. An IDPS allows an investor to invest in a range of investment options across different asset classes, investment managers and investment styles.
The IDPS has custody of the investments with the investor having a beneficial ownership. Investments are legally held by a custodian or trust and not in the investor’s name. This means the investor does not have a direct unit or interest in the managed investments, and instead only has a relationship with the IDPS.
Examples of IDPS like schemes include BT Panorama, Macquarie Wrap, and Netwealth. For a full list of IDPS availability for CFM products see www.cromwell.com.au/invest/advisers/
It is an offer document produced for the sale of a product or asset to wholesale investors.
It is a financial metric used to evaluate the profitability of an investment. It represents the annualised rate of return that an investor can expect to receive over the life of the investment. The IRR is calculated by finding the discount rate that makes the net present value (NPV) of all cash flows from the investment equal to zero. In simpler terms, it’s the rate at which the present value of future cash flows equals the initial investment. The higher the IRR, the more profitable the investment is considered to be.
The ratio of a company’s loan capital (debt) to the value of its equity. Also known as gearing or LVR (Loan to Valuation Ratio).
Refers to how easy it is to convert assets into cash.
A unitised portfolio of property assets, listed on the Australian Securities Exchange (ASX). Also known as a REIT (Real Estate Investment Trust).
The ratio of the amount borrowed to purchase an asset (building/property) to the valuation of that asset. LVR’s can change over time as either (or both) debt increases or decreases, or the value of the asset increases or decreases.
It is the National Australian Built Environment Rating System used to measure a building’s energy efficiency, carbon emissions, water consumed, and waste produced, to produce star ratings which can then be compared to similar buildings.
Refers to the total value of a fund’s assets minus its liabilities. It is calculated by subtracting the fund’s liabilities (such as outstanding debts and expenses) from the total value of its assets (such as cash, investments, and other holdings).
For managed funds and exchange-traded funds (ETFs), NAV per share is calculated by dividing the NAV of the fund by the total number of units/shares outstanding. NAV per unit/share represents the value of each unit/share in the fund.
NAV is an important metric used by investors to assess the value of their investment in a fund. It provides insight into the fund’s overall financial health and can help investors make informed decisions about buying or selling units/shares in the fund.
Refers to the percentage of rented or leased space within a property compared to the total space available. It’s a crucial metric in real estate that indicates the level of utilisation and income generation for a property. A high occupancy rate suggests strong demand and stable income streams, while a low occupancy rate may indicate potential vacancies and reduced income.
It is a formal document that serves as a legal offer for a financial product. It provides detailed information about the features, risks, and terms of the product, helping investors make informed investment decisions.
They are pooled investments in real estate typically managed by a fund manager. They allow multiple investors to combine their funds to purchase a property that might be beyond their individual financial reach.
The risk-free rate of return is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.
A TMD describes who a product might be suitable for. It sets out the target market for the relevant fund as well as the distribution conditions, review triggers and other relevant information. It helps investors and advisers understand the class of retail investors who the financial product is likely to be appropriate for based on investment objective, proportion of overall investment, investment timeframe, liquidity requirements, and risk/return profile.
It is a type of investment that gives investors the ability to participate in commercial property assets by investing in a fund. Unlike publicly traded funds, unlisted property funds are not listed on stock exchanges, offering a different avenue for accessing property investments. Unlisted property trusts operate similarly to direct investments in commercial property but with the advantages of professional management and diversification. Learn more here.
It is a metric that indicates the average duration until all leases within a commercial property expire. It provides insight into the stability and predictability of income streams from the property’s leases.
A measure of returns to investors that is expressed as a percentage over a set period of time.