Trustees should consider greater allocations to unlisted commercial property in SMSF portfolios for better diversification and returns, according to a manager for the asset class.
Speaking at the recent SMSF Association 2017 National Conference in Melbourne, Charter Hall head of direct property Steven Bennett said: “Given the modest allocation to commercial property in most self-managed funds, any increase would provide significant diversification and portfolio construction benefits.
“Due to the low correlation between unlisted commercial property funds and other key asset classes like Australian equities and bonds, by including a 10 to 20 per cent allocation to unlisted commercial property, the overall risk and volatility on the SMSF portfolio can be reduced.”
In regard to returns, Bennett pointed out some fund managers with unlisted commercial property offerings, such as Charter Hall, were generating yields in excess of 6.25 per cent, outperforming residential property, which was producing average returns of 2.5 per cent to 3 per cent a year.
He also dispelled any concerns SMSF advisers and trustees might have over the level of gearing property managers might be using.
“In the past, property fund managers were criticised for over-gearing their funds, but that is not the case today when dealing with large institutional property managers,” he said.
“Gearing levels for unlisted commercial property funds are around 45 per cent. This is lower than the maximum gearing allowed on most SMSF limited recourse borrowing arrangements.”
Further, he predicted a bright future for the asset class based on estimated population growth of over 30 per cent in Sydney, Melbourne and Brisbane in the coming two decades.