Select your country Global Cromwell Property Group Asia Pacific Australia Cromwell European REIT New Zealand Europe Cromwell Property Group Europe Germany Denmark France Benelux Sweden Czech Republic Finland Italy Poland UK
Person typing on a laptop

Learn

Home The Essential Guide to Investing in Unlisted Property
August 1, 2024

The Essential Guide to Investing in Unlisted Property

Cromwell continually strives to help securityholders and potential investors better understand the nature of the market – and our business – so that they can make more informed investment choices.

As such, we have compiled a comprehensive series of papers that form The Essential Guide to Investing in Unlisted Property, which is now available online. This information set will be a valuable resource for anyone seeking to diversify their portfolio and explore alternative avenues for growth through unlisted property funds and trusts.

The guide also highlights the key benefits of investing in an unlisted property trust, which include:

  • The pooling of investors’ funds, providing access to assets they could not otherwise purchase individually, such as large office buildings or major shopping centres.
  • A regular income stream, with distributions ranging from monthly to six-monthly payments.
  • Professional management, covering due diligence, debt, property management, and tenant management.
  • The need for only a small investment, allowing investors to more easily diversify across properties and managers.

Get the full, unabridged guide for free

Cromwell’s The Essential Guide to Investing in Unlisted Property is comprised of four parts:

Part 1 – The different property asset classes
Part 1 explores the differences between the residential and commercial property and provides an overview of the sub-classes of commercial property – retail, office, industrial, and specialist properties.

Part 2 – Various ways to invest in commercial property
In part 2 we examine different investment methods, ranging from direct property ownership to professionally managed property trusts.

Part 3 – How does an unlisted property trust work?
Part 3 provides insight into the structure of unlisted property trusts; the issuance of units; borrowing arrangements; property management; costs and fees, distributions; tax-deferred income; and the process of exiting your investment.

Part 4 – Reviewing an unlisted property trust
Before investing in an unlisted property trust, it is important to understand and review the provided Product Disclosure Statement (PDS) and Target Market Determination (TMD), particularly the ‘risks’ section, to fully comprehend the nuances of the trust and its assets. In part 4 we provide a summary of what to look out for.

Get the full guide

The different property asset classes

The first section of The Essential Guide to Investing in Unlisted Property clearly separates the property asset class into two groups – residential property and commercial property.

For the purposes of this article, we’ll highlight office properties, which fall within the commercial property class.

Excerpt from The Essential Guide to Investing in Unlisted Property: Part 1

Commercial property

 

The fundamental difference between commercial and residential property is that commercial properties are usually valued based on the income return they will provide to an investor, which is known as the capitalisation rate (cap rate) or yield.

For example, if an A-grade office building typically trades at a cap rate of 7% at a given point in time, then the market value will be calculated using the formula: income/cap rate = value. So, for a building generating an income of $1,000,000, its theoretical value would be $14.3 million (i.e.,$1,000,000 / 7%).

The value is also affected by additional factors, including the lease terms, quality of tenant, and other building attributes. Management expertise is an essential consideration with commercial property, as there are undoubtedly more issues to be addressed compared to residential property.

Tenants, particularly government or large corporate tenants, have specific and often complex needs that may include how their leases are structured to ensure better funding or tax outcomes.

Compliance requirements, such as Occupational Health and Safety, are also a significant burden to commercial property owners, and understanding the applicable regulations and associated costs is essential. For these reasons, most commercial property owners use professional property managers, which should be a core part of a property fund manager’s business.

Office property

From a yield perspective, office properties can vary substantially. There is a substantial difference in the yield you would expect to receive from a premium-grade building (low yield) compared to a C or D-grade building (high yield). Other factors which can affect yields include the location of the property, the tenants and length of lease.

Premium-grade property is not necessarily a better investment than a lower grade building; however, it does tend to attract more financially secure tenants, which lowers the risk for investors. As office buildings are rarely located in isolation, it is important to review the supply and demand characteristics of the area in which the property is located to ensure long-term demand for space in your building.

In recent years, government and blue-chip tenants have increased their demand for newer, environmentally sustainable office buildings. This is a vital consideration when assessing the long-term outlook for office properties.

Office building quality

Office buildings in Australia are classified under a voluntary, market-based system developed by the Property Council of Australia (PCA). The PCA’s Guide to Office Building Quality provides two classification tools – one for new buildings, and the other for existing buildings.

The Guide classifies office buildings into Premium, A and B grades for new buildings and additional C or D grades for existing buildings – according to their size, location, configuration, environmental performance, communications, security, lifts, air conditioning, as well as other services and amenities.

To earn a Premium classification, a new building would need to be a landmark office building located in a major CBD office market with expansive views and outlook, ample natural light, premium quality finishes and amenities, and a 5-Star or above National Australian Built Environment Rating Scheme (NABERS) Energy rating.

It would also need to have a minimum net lettable area (NLA) greater than 30,000 square metres (sqm) if in Sydney or Melbourne.

The criteria to earn a Grade A classification is less stringent, but still requires a building to have high quality views, lifts, finishes and amenities, a 4.5-Star or above NABERS Energy rating and a NLA over 10,000 sqm if located in major capital CBDs.

B-grade buildings are required to be ‘good quality’ with a minimum 4-Star NABERS Energy rating.

Existing buildings are rated on slightly different parameters with additional categories for C and D-grade buildings. The ratings acknowledge that existing buildings will not be as energy efficient as new buildings, but reward owners and tenants for taking steps to improve efficiency.

Cromwell’s The Essential Guide to Investing in Unlisted Property is available to download for free. 

Download your copy
Excerpt from The Essential Guide to Investing in Unlisted Property: Part 2
Various ways to invest in commercial property

As the title suggests, the second paper in the guide closely explores the options that everyday investors have to enter the commercial property market. These options include:

Direct investment

Purchasing a property directly yourself, with or without borrowing, is commonly used for residential property investment. For commercial property, however, this is usually only an option for very wealthy investors.

Private syndicates

Sometimes a group of investors get together to pool their money and buy a property. In this case, there may be limited legal agreements and professional involvement around the choice of assets and their management. This type of investment generally requires a substantial level of investment by each investor, and may or may not include borrowing.

Pooled professionally managed property trust

A property investment can be made through a professionally managed investment trust which is regulated by the Australian Securities and Investments Commission (ASIC). In Australia, there are two major types of property trusts: Australian Securities Exchange (ASX) listed Real Estate Investment Trusts (A-REITs) and Unlisted Property Trusts.

ASX-listed Real Estate Investment Trusts

Property trusts listed on the ASX used to be called listed property trusts but are now more typically known as ASX listed Real Estate Investment Trusts (A-REITs). They invest in a wide range of commercial property types and can be traded just like any other share. The wide variety of A-REITs available, the large asset diversification generally within each A-REIT, and their high level of liquidity are strong positives.

Unlisted property trusts

Unlisted property trusts provide an investment with characteristics most like a direct purchase of a commercial property, with the added benefit of professional management. As unlisted property trusts are generally priced based on the underlying valuation of their assets, their price volatility is a lot lower than A-REITs and the value of the investment is primarily influenced by movements in the commercial property market, rather than by the broader share market.

Understanding unlisted property trusts

Read the full, unabridged version of parts 1 and 2 of The Essential Guide to Investing in Unlisted Property, as well as parts 3 and 4 in the series – ‘How Does an Unlisted Property Trust Work?’ and ‘Reviewing an Unlisted Property Trust’. Parts 3 and 4 of the guide explain unlisted property trusts in easy-to-understand detail. Download your copy for free today.

GET THE GUIDE