Diversification versus specialisation of your commercial property portfolio
The decision whether to diversify your property portfolio or specialise in owning just one type is something every commercial property investor should examine.
Specialisation involves owning and becoming an expert in just one specific type of commercial property or niche market, whether it be retail, high-end offices, or industrial warehouses.
Diversification, on the other hand, entails spreading investments across various property types and results in a well-rounded property portfolio.
Both tactics provide investors with associated risks and benefits. Let’s take a more
in-depth look at each method and the risks and benefits to be aware of for each.
Specialisation and commercial property investment: becoming a niche market expert
When an investor chooses to specialise in owning just one type of commercial property, their focus can be narrowed in so they can become experts in their particular market niche. After some time and practice, investors can then leverage their in-depth knowledge and tailor their investment strategies to capitalise on unique opportunities within their chosen sector.
However, there are disadvantages to putting all your eggs in one basket. Investors can be putting themselves at greater risk should their particular asset class see changes in demand or be impacted by an economic downturn.
Here’s a quick breakdown of the benefits and risks of specialisation to consider.
Benefits of specialisation for commercial property investors
1. The advantage of becoming an expert
Specialising in owning just one type of commercial property enables investors to develop deeper knowledge and expertise in a specific market segment, enabling them to make more informed decisions. They become familiar with what to look for when investing, are more aware of market demand and current trends for their property type, can more easily monitor external market influences, and become more familiar with the types of questions and issues that may arise from their tenants.
2. Focused strategies allow investors to capitalise
As investors become more informed about their chosen property niche, they’ll be able to take advantage of unique opportunities that arise for their given asset class. Similarly, they’ll be able to use their knowledge to make better decisions when it comes to choosing whether to purchase a particular property. This provides investors with a greater chance to capitalise on their investments as knowledge of one particular asset class will generally lead to better results in terms of income and cash flow. Investors also become more familiar with monitoring the types of expenses these properties can incur and therefore can put strategies in place to manage the property more efficiently to get better results.
3. Greater networking opportunities and improved reputation
By becoming an expert in a specific commercial property sector, investors will form relationships with relevant industry professionals, such as agents and developers for example. This can lead to valuable networking opportunities where information can be shared. Investors may even develop a reputation as a go-to person to rent from or get advice from around their particular asset class. These networks may also help investors in becoming aware of additional prospects for new and exciting property investment options.
Risks of specialisation for commercial property investors
1. Vulnerability to market changes
Choosing to specialise in just one type of commercial property can make investors more susceptible to market changes that may impact their particular asset class. Should demand for their property change or downturns occur in that sector, they will be at greater risk.
2. Limited diversification benefits
A specialised commercial property portfolio may lack the safety net that comes with a diversified approach, especially during times of economic uncertainty.
Diversification and commercial property investment: mitigating associated risks
Diversification is a risk management strategy that involves investing in a variety of commercial properties to minimise exposure to any single market or asset class.
The rationale is that a well-rounded portfolio can help cushion the impact of market fluctuations or downturns in specific sectors. By diversifying their property portfolio, investors can potentially achieve more stable returns over time.
Here’s a quick breakdown of the benefits and risks of diversification.
Benefits of diversification for commercial property investors
1. Risk mitigation
As implied earlier, diversifying a portfolio across different commercial property types (such as retail, office, and industrial) can help protect investors from adverse market conditions affecting a particular sector.
2. Income stability
Different property types generate income in various ways. A more diverse portfolio allows investors to take advantage of cash flow from each property type. Should one sector experience a downturn, you’ll still have other assets that may not be affected to draw income from. Diversified portfolios often provide more consistent cash flows and therefore income stability for their owners.
Diversified portfolios are often more adaptable to changes in economic conditions, ensuring that investors can capitalise on emerging opportunities.
Risks of diversification for commercial property investors
1. Reduced expertise
Managing a diverse portfolio requires a broad understanding of various property types. Diversification can potentially dilute an investor's expertise in any specific sector. However, it’s important to note that this risk can be mitigated by seeking advice from relevant industry professionals, such as our team at Commercial Collective.
2. Can be resource intensive
Diversification may demand more time, effort, and resources due to the need for
in-depth research and monitoring of multiple markets. You may find that an experienced Property Manager can help to mitigate the time required as they will take care of rent reviews in line with the current market for you.
Diversifying with residential properties and mixed-use developments
While commercial property is the primary focus, investors shouldn’t overlook the potential benefits of diversifying their portfolios with residential properties and mixed-use developments or shop tops.
Residential properties can provide a stable income stream and function as a counterbalance to commercial property sector changes.
Mixed-use developments or shop tops, combining residential and commercial spaces, offer the best of both worlds by diversifying income sources while creating vibrant, community-oriented spaces.
While each investor's personal preference and market conditions play a role in deciding whether to specialise or diversify a property portfolio, we recommend investors take a balanced approach that considers both methods.
Although specialisation undoubtedly offers advantages in terms of expertise and focused strategies, a diversified approach allows investors the ability to withstand sector-specific challenges should markets fluctuate and economic shifts occur.
Our team is always available to assist investors with either approach and we have experts who specialise in retail, office, and industrial assets who can help answer questions. This can be particularly handy for those who wish to diversify but don’t have the time to become specialists in every asset class.
Contact us at our Newcastle or Maitland office or send us a message if you’d like more information on any prospective property.