- Commercial buildings in a good location can deliver stronger returns and a higher capital gain
When investing in any sort of property, it’s particularly important to know your location and the potential for growth.
A syndicated (managed fund) will try to articulate this in their documents but it is always good to have your own working knowledge and do your own research into the location so you know where the growth is, if it is a good location and if it will still be a good location in five years-time.
- Understand the risks associated with owning and leasing a building
Commercial office assets require ongoing maintenance and property management. Depending on the type of building and the mix of tenancies, the cost and burden of this management can fluctuate.
Having a basic understanding of how commercial leasing works, the obligations of a commercial property owner to its tenants and how much has been set aside to maintain the building and manage vacancies is important.
As an investor there is an assumption and requirement that the repairs and maintenance for a property will be dealt with in a professional and value adding manner and covered by funds provided through the property income stream. Unfortunately, some companies, even though they retain some funds from the capital raising don’t often spend the money and find better satisfaction in returning the money to investors than maintaining the assets.
Further, if you find a fund manager that maintains their buildings to a high standard, then you will see the rewards in occupancy, rent values and capital value.
- Is it really your cup of tea?
Owning units in a wholesale commercial property fund is a long-term commitment. It is similar to owning the property outright, in that, you can’t realise the capital value of your investment until the property is sold.
It comes back to liquidity. Can you leave your money invested in a building for five or seven years or more as opposed to buying into an AREIT (a listed open-ended retail property fund) where you can trade in today and trade out tomorrow.
You might get 6.5 to 7% on an AREIT and a small capital growth in the unit value, but syndications will often give you that or more and typically you can be looking at a return of 8.5% to 9% for the term.
- Get to know the people behind the fund
I don’t think you have to know your fund managers to the depth that I do but one of the attractions of most syndicators is that they are typically not a large corporate entity with high overheads and layers of management. They are typically a core group of people that can be contacted and who have a vested interest in the outcome for investors because they are in fact co-investors themselves.
- Understand what a fund manager does and how they do it
You are taking a lot on trust when you enter a syndicated arrangement, so it’s important that you feel like you can trust the managers to work with your money to make more gains. Look at the experience of the people behind the trust, their track record of delivering on their promises and the number and type of properties in their portfolio. Naturally, if you have experience or exposure to the types of properties in which they invest, then you will also understand more about the business.