Investing in Commercial Real Estate
Despite a tail-off in demand for commercial real estate during the Covid-19 pandemic, the asset class is expected to return to growth rates similar to those of the last decade within five years.
With offices reopening from national lockdowns imposed by many countries, employers are beginning to accommodate the coronavirus as they introduce hybrid work models requiring new and existing staff to visit their workplace periodically.
Investors seeking long-term exposure to commercial real estate are therefore likely to experience returns, although different risk profiles associated with different modes of investment may impact any future returns.
Residential Vs. Commercial Real Estate
Residential real estate is real estate that is rented or sold to consumers and ranges from family homes and rental properties to large multifamily (multi-tenant) developments with hundreds of units. Residential real estate holdings typically require more management than commercial real estate properties.
Commercial real estate, however, is often more complex than residential real property assets as it is often purposely developed for applications ranging from office, warehousing and industrial space to parking facilities. Leases for commercial real estate are also more complicated because they are usually tailored to the needs of commercial tenants and will invariably need to satisfy specific circumstances. Leases are also longer - at an average length of between five and ten years and usually require less management provision than residential properties.
Commercial Real Estate ETFs
Exchange-traded funds (ETFs) are funds that include several stock or bond options. ETFs are very similar to index and mutual funds in that they offer a wide diversification of investments and their cost is relatively low.
Investing in commercial property real estate ETFs can be a smart way to benefit from trends in the commercial real estate sector without holding any properties. When the industry is doing well, the price of the stocks in commercial real estate ETFs reacts accordingly. However, investors do not have to worry about downswings in the real estate sector because it is very easy to exit your position by selling your ETFs any time you like.
It's important to understand that when you invest in ETFs, you are not actually investing in any projects but instead in the companies and real estate investment trusts that are involved in these projects.
Commercial Property Real Estate Mutual Funds
A mutual fund is similar to an ETF, with the major difference being that mutual funds are sold at the end of the trading day while ETFs can be sold during the trading day. Mutual funds are highly liquid and often come with reasonable management fees. Some mutual funds can perform better than the market, with many of them beating the market significantly.
If you are not interested in investing in residential real estate, you need to check that the mutual fund does not invest in both commercial and residential real estate. These are the mutual funds that specialize in commercial real estate investments. The good news is that there are a lot of resources you can use to research the best mutual funds and to find top-performing ones whose portfolios comprise a diverse range of holdings.
Commercial Property REITs
Real Estate Investment Trusts (REITs) operate like mutual funds. Once investors pool their money and put it into a REIT, the company behind it buys or leases commercial property. Once the property is sold or the rent is paid, the profits are distributed among all the investors in that particular REITs. Investors can diversify their investments by choosing different REITs that invest in different real estate classes. Even within a single REIT, investors still get a lot of flexibility since a single REIT can invest in different commercial property classes.
REITs are a very popular way of investing in real estate for those who do not have the funds to purchase whole properties or those who do not want to deal with everything that comes with managing a commercial property.
When picking a REIT, it is important to choose one that is publicly traded. These REITs are transparent, have high liquidity meaning they can invest in many properties, and have significantly lower fees than those that are privately held. Second, you’ll want to choose REITs that hold products you are interested in and that are in favourable locations. You can invest in REITs that specialize in multifamily, office hospitality or rental properties.
Third, check how the REIT is managed. The best way to know if it is poorly managed is to check how it has performed over various upswing and downswing cycles. You can also look at whether the REIT has diversified investments or specializes in one kind of product. A diversified REIT is always better because it hedges against real estate risks.
When selecting a real estate REIT, it is also important to look at the dividend yield. The dividend yield will give you a better idea of how the company is performing. A higher dividend yield means the company is performing very well and thus can afford to pay out more of its profit as dividend to its shareholders and investors.
The dividend yield can be a useful instrument for investors who are yet to decide between investing in a REIT or high dividend stocks. While you can find information about the dividend yield of a REIT from various sources, WealthSimple, a company that helps investors grow their money, has a detailed list of high dividend stocks investors should consider. Using their WealthSimple Invest tool, investors can invest in any of these high dividend stocks or stocks from companies around the world. WealthSimple already handles over $10 billion in client assets and is regarded by many in the industry as an investment titan. Investors also get a free stock, as well as a team of financial advisors standing by to help should they decide to invest with WealthSimple.
Individual Property Company Shares
While mutual funds, ETFs and REITs expose you to numerous investment holdings, some people are only interested in holding the shares of a single company. If this type of investment suits you, there are companies that buy and manage commercial real estate that sell their individual shares to interested inventors. Depending on your investment goals as well as how and where you are looking to put your money, such single share investments might be better than the pooled investor options offered by mutual funds and ETFs.
Companies that offer individual company shares often focus on smaller commercial real estate holdings such as senior housing, apartments, smaller office buildings, student housing and the like.
Because these are single shares, the upsides and the downsides are huge. The returns on these types of investments are higher than you would find anywhere else. However, the risk is also higher because it is difficult to diversify your investments when you decide to invest in individual company shares. Even with all the risk surrounding these types of investments, the upside is that you still have a lot of flexibility on what to include in your portfolio should you decide to invest in more than a handful of these companies.
Because of the potential downside, all investors interested in these companies should do their research and due diligence to ensure they invest in companies that pose as little risk as possible.
Individual Construction Company Shares
Individual construction company shares work the same as those of the property companies discussed above. The key difference is that you will be investing in companies involved in new construction. Construction companies have seen tremendous growth as the pandemic ends and the demand for housing has gone up.
Because there will always be a need for new real estate and commercial properties, investing in these construction companies is something investors should consider.
Direct Real Estate Investing
Direct real estate investing is where you loan money directly to a real estate company. In many cases, these are small opportunities on a smaller scale than we have discussed above. These kinds of opportunities can be found online and on various crowdsourcing websites.
The upside for the investors is that they get the cash injection they need at a reduced cost. The main downside of this type of crowdfunding is that it is very risky. This is why it is so important to research the company handling the crowdsourcing to see if there are any guarantees and what other investors say about them.
There are two main upsides to this type of investment - returns and duration. Because real estate companies will often turn to peer-to-peer lending as a last resort, they are willing to pay a higher interest rate than if you put the money in other types of investments. Second, many of these loans are short-term in nature, meaning a year or less. This means you risk your money for a shorter period and for a higher return than you would not realistically expect to get anywhere else.
If you are interested in investing in commercial real estate, there are several avenues you can use to do so. It is very important that you do your research to ensure you understand the investments you are interested in and to reduce your risk while maximizing your returns.