Investing in Commercial Property for More Reliable Returns

Whether building a nest egg mid-career or redeploying capital for retirement, commercial property remains a premier asset class. Delivering high net yields and secure covenants, it serves as the engine room for sophisticated portfolios.

However, obtaining high-grade exposure to the commercial property market alone isn’t a simple proposition. Outright ownership of institutional-grade assets such as logistics hubs, office assets or neighbourhood shopping centres are often financially out of reach. Even with the available capital to buy commercial property individually, this option is far from a passive income opportunity, given its complex commercial leases, tenant demands, and maintenance cycles.

Real estate investment trusts (REITs) bridge this gap. For high net worth individuals and SMSF trustees considering exactly how to invest in commercial real estate, Sentinel Property Group provides a strategic solution. By pooling capital through an unlisted trust structure, we allow individuals to enjoy the significant benefits of being commercial property investors, with fewer risks and operational burdens.

How Investing in Commercial Real Estate Outperforms the Residential Route

The “landlord” option – whether via direct ownership of a suburban rental or trust-based residential units – is the default for many Australian property investors. However, for those seeking genuine cash flow, the residential model is structurally flawed compared to commercial assets.

The Yield Gap: Net vs. Gross

Residential yields (typically 3–4%) are “gross” figures. Deducting rates, insurance, repair costs, and property management fees frequently drives the “net” yield below 2%.

In contrast, investing in commercial property via a Sentinel trust targets a far higher net distribution. This is driven by “Triple Net” lease terms where the tenant, often a government agency or national retailer, absorbs the outgoings.

This ensures the rent collected is “true” income, protecting investor cash flow from inflationary cost creep.

Covenant Strength and WALE

In residential property, income security depends on an individual’s salary, but with commercial premises, your tenants are businesses. At Sentinel, we anchor our investment portfolio with resilient, blue-chip tenants: Commonwealth or State Government departments, major national retailers in dominant regional centres, or key logistics operators.

Unlike residential tenant agreements, most commercial tenants commit to long-term solid leases (5–10 years), supporting a higher Weighted Average Lease Expiry (WALE) and reliable income. Sentinel actively targets covenants with fixed annual rent increases or reviews linked to the Consumer Price Index (CPI), ensuring commercial yields benefit from built-in income growth and inflation protection.

Strategic Value Creation

While residential property value relies on comparable suburb sales, value in the commercial market can be manufactured. Active management allows a landlord to increase market value by restructuring leases, physically repositioning the asset (e.g. adding hardstand), or improving tenancy mix. This is “forcing” appreciation rather than waiting for passive capital growth.

The Sentinel Edge in Commercial Property Investing

Success in commercial investment relies on selecting the right fund manager. Unlike passive managed funds that simply track the market, Sentinel employs a high-conviction, active strategy divided into two distinct phases.

Strategic Acquisition

We do not simply buy “trophy properties” at peak prices. Sentinel identifies “unloved” or distressed assets and off-market properties where value can be unlocked. By conducting deep due diligence into consumer demand and demographic shifts, we target opportunities such as dominant retail property or logistics hubs, often overlooked by institutional competitors. This counter-cyclical strategy allows us to acquire potentially high-quality properties at a discount to replacement cost.

Active Value Creation

Once acquired, we deploy our in-house team to aggressively lease, refurbish, and reposition the asset. Our focus is on manufacturing value by improving tenant quality. We replace weaker covenants with reliable tenants to secure long-term cash flow. This hands-on approach ensures that we maximise the asset’s worth before divesting at the market peak.

How to Invest in Commercial Real Estate: The Structural Divide

For the individual asking how to start commercial property investing, three pathways exist. Understanding the distinction is critical.

Direct Ownership: The High-Risk Route

Buying a standalone commercial investment property offers control but concentrates risk. The barrier to entry is high, often requiring a larger deposit (30–40% of the purchase price). Worse, a single vacancy can reduce income to zero overnight. Finding quality tenants and managing vacancy rates becomes a full-time job.

Listed A-REITs: The Volatility Trap

For listed investments on the ASX (A-REITs) the cost of liquidity is exposure to market sentiment and associated risks. Share prices fluctuate daily, often decoupling from underlying property value. A panic in the equities market can devalue a portfolio instantly, even if the commercial assets are performing well.

Unlisted Property Trusts: The Sentinel Approach

Unlisted trusts offer “pure” property exposure. Unit prices are determined by independent asset valuations (Mark-to-Model), not daily sentiment. This structure trades immediate liquidity for stability, acting as a volatility shield for your capital.

Accessing Institutional-Grade Opportunities

Investing in commercial real estate requires a diverse portfolio to mitigate risk. Sentinel’s investors gain exposure to a national footprint, spanning:

• Industrial Properties: Distribution centres, manufacturing plants, and warehouses with high-value hardstand.
• Retail Space: Dominant retail centres with high competitive barriers.
• Office: Strategic office space in key metropolitan growth corridors and capital cities.
• Specialised Assets: Niche opportunities like service stations or bulky goods centres.

By aggregating capital, individual commercial investors own a stake in these high quality commercial properties, benefiting from professional management and economies of scale.

The Tax Advantage: Efficiency for Significant Capital

For investors including trustees of self managed super funds, tax efficiency is as critical as yield. The unlisted trust structure offers specific tax benefits for managing large capital sums.

Crucially, unlisted trusts often include a “tax-deferred” component. When the trust claims non-cash deductions including depreciation on plant and equipment, it can shelter a portion of the monthly distribution from immediate tax. For smart investors, this effectively lowers the investment cost base and enhances after-tax returns.

Level Up Your Commercial Property Investment

For sophisticated investors and high net-worth individuals wondering how to start investing in commercial real estate, Australia-wide, the unlisted trust structure simplifies the path to institutional ownership. We provide an optimal pathway to enhancing your strategy with commercial property, compared to the market volatility and “landlord trap” associated with alternative options.

Register your interest to discover how you can gain access to premium commercial property investment opportunities.

Disclaimer: This article is provided for general information only and should not be taken as financial advice. We recommend speaking with a licensed financial adviser to determine whether any investment strategy is appropriate for your individual circumstances.