As questions arise about where the Australian residential market is headed in coming years, investors have been encouraged to consider some diversification in their portfolios.

For many investors, moving away from the residential sector and what they know may seem daunting, but the time may be right for them to take a dip in the commercial sector, one toe at a time.

Rather than simply jump in the deep end of shops, factories or warehouses, investors have been encouraged to explore the options that come with unlisted property funds.

“Any investment portfolio should have diversification. If you’ve got a portfolio of property, then that diversification should be residential property and commercial property,” Jason Huljich, chief executive officer for unlisted property funds with Centuria told Your Investment Property.

“The reason we think unlisted property funds are a good way invest is because they give normal investors access to institutional grade property,” Huljich said.

Unlisted property funds operate by the fund manager purchasing a property, individual investors then purchase units in the fund, which equate to a percentage share of the asset.

Investors then see returns via rental income the asset, such as large office block, may generate and then at the completion of the fund’s lifetime when the asset is sold.

While investors who move to the commercial sector may be able to generate solid returns if they go solo, Huljich said unlisted property funds offer some additional security.

“Through an unlisted fund you get access to quality tenants. When you’re buying these larger grade buildings you’ve usually got something like government agencies or ASX listed companies as tenants,” he told Your Investment Property.

“If you’re a small investor and you’re going to try and buy a smaller commercial or retail asset there are some issues.

“There are a lot of people chasing them, so there’s a lot of competition. If you’re buying a small shop or something like that then the quality of your building and quality of your tenant are likely to be inferior.

“Your return will probably be inferior too. For a smaller retail asset you’re probably looking at returns of 4% to 5% compared to 7% or 8% [through an unlisted property fund].”

Through Centuria, Huljich said investors can participate in a fund for as little as $50,000, which can make it a prime way for investors starting out to increase their capital.

But while an unlisted fund may present a cheaper option and perhaps a more hands off approach to investing, Huljich said investors should still somewhat of a cautious approach to participating.

“In a lot of ways it’s similar to investing in residential real estate. You’re looking for quality property, quality locations and quality tenants.

“A lot of the basics are the same, but it doesn’t mean you shouldn’t do any due-diligence. You still need to look at the asset, look at the tenants and look at the fund manager and their history. Due-diligence still remains a massive thing.”