Term deposits or managed funds? Should you make the switch? We ask a Chartered Accountant
21 July 2017
| Category - Advisory

Why make the switch from term deposits to commercial property funds?

Stronghold Investments recently caught up with Chartered Accountant Darren Smith to find out what motivated him to move his cash into unlisted commercial property investment trusts.

Why do you invest in Stronghold Property Trusts?

The cash rates for term deposits in the bank are low – you’re lucky to get 3% on your money. Stronghold forecast a lot better cash return and because it was around a commercial property and the concept of business parks which I know and understand, it was an easy decision.

I operate out of a business park, so I know how they work and understand the potential growth in this market.

The Information Memorandum that Stronghold provide, makes it easy for me to understand the income and expenses of the trust and how the forecast return is worked out. Understanding the numbers is critical for me to make an investment decision.

What sort of investor should be attracted a commercial property trust or investment of this type?

Someone with cash sitting in the bank earning low-interest rates, who is time poor and interested in getting a better return on their money. Self Managed Super Funds are also a great investment vehicle for these property trusts.

What is the advantage of buying into a commercial property trust compared to buying a commercial property outright?

Unit trusts like the ones Stronghold put together give you the ability to size up and reduce your risk by investing a smaller amount in multiple properties rather than all for one.

You can get into a larger commercial property investment than what you could own outright, and you don’t have to manage them. A lot of investors are time poor and don’t want to do the work to manage a commercial property.

What do you look for in a commercial property investment  and how do you know if it’s a good investment?

Firstly, I look at the rate of rental returns. I check the rents for the property in comparison to the local area and ask myself are the rents in line with what other commercial properties are generating in the area?

If a fund has over inflated the rents with incentives in order to get good short term returns for investors, then that would be a warning sign. Ultimately, rents will come back to market rates on renewal and it will be those renewed leases that ultimately determine the capital value down the track.

Next, I look at the strength of tenancy mix – if they have a lot of smaller companies then there is a greater risk that the occupancy will fluctuate. If they are larger reputable companies then that is a positive thing.

I also check if the building itself lends itself to a spread of tenants. If it’s 2000sqm and only has one tenant that’s not as good if it has a spread of 4 tenants with 500sqm each.

It’s also important to look at the area around the property – what’s the infrastructure like, what’s the access like in those areas?

Lastly, consider how long the existing tenancy agreements have to run. The longer, the better because it gives you some sort of certainty that the advertised return can be delivered.

What would you tell someone who was looking to switch their term deposits to commercial property funds?

If I’m talking to clients about it, the first thing they need to know is that these things are not always about capital growth and they run for six to seven years.

They also need to be looking at this type of investment from a cash return point of view. If at the end of the term we get our money back and in the interim get 8% cash return per annum, then that’s a reasonable return. If we happen to get capital growth at the end of that, I see that as a bonus.

When I’m looking for a commercial property, I’m looking for one that can retain its existing cashflow position rather than quick capital growth.

What sort of cash return are you looking for in a commercial property trust?

Currently, it’s not unusual to see a 4/5% yield in direct property investment, so when you see a 7/8% that is an investment worth looking at.

A 7.5% yield also means that there is some room for capital growth if other commercial properties in nearby areas are selling on lower yields. Also, there is the possibility that buyers in the future will be prepared to buy on lower yields.

What do accountants need to know about reporting property trusts on a clients’ tax return?

These sort of things are often easier to account for than direct property investments because the fund manager does all the heavy lifting for you.

We’re provided with quarterly and end of year reports detailing the returns and depreciation which are easy to understand and account for.

About DJ Smith Group

DJ Smith Group is an accounting firm based in Clayton and Melbourne CBD. Their team of dedicated Chartered Accountants provide a high level of accounting, tax and financial services to individuals, retirees, self-managed super funds, investors and businesses.

The Principal, Darren Smith, is a Chartered Accountant with extensive experience, including working in the big 4 and medium sized firms before becoming a partner of a city based firm in 2000.

Darren works with business owners to grow their businesses and create personal wealth within and outside of their business.

For more information visit http://www.djsmithgroup.com.au.