Most New Zealanders understand the logic of owning a rental property. You buy it to hold, it earns rent along the way and over time its value has the potential to grow. You don't expect to sell it overnight, and you generally don't check its value every day. Unlisted commercial property works on a similar basis. It is a long-term asset class, designed to be held for years, and it can play a valuable role in a diversified portfolio. 

Value is built over years, not months 

Commercial property takes time to perform. The rental income may be there from day one, but many of the decisions and market movements that shape the eventual return on an investment play out over years. 

Some of that value is created at the property itself: leases are renewed, rents are reviewed, vacant space is let and buildings are improved. Some comes from the wider market, as demand for space, rental growth and investor appetite change over time. Neither happens overnight. 

Market conditions move in cycles. Holding property over the longer term gives an investment more opportunity to move through those cycles, rather than relying on buying or selling at exactly the right moment. It also gives a manager greater flexibility to sell when market conditions and the plan for the asset support it, rather than being driven by a fixed date. 

Why short-term market sentiment matters less 

Unlike listed commercial property investments, unlisted commercial property isn't continuously traded and repriced on a public market. Listed property prices can move daily in response to property fundamentals, earnings, interest rates and debt, but also broader equity market movements, investor sentiment and short-term trading activity. 

Unlisted property is independently valued at intervals, based on the property's income, performance and wider market evidence. Its value still changes as property markets move, but it isn't subject to the additional influence of day-to-day sharemarket sentiment and trading activity. 

For unlisted property investors, the focus is therefore more naturally on performance over a longer-term horizon – the income the property generates, changes in its underlying value and the delivery of the long-term strategy for the asset. 

Income is earned along the way 

While value builds, investors don't have to wait for a sale to see a return. Tenants pay rent throughout, and after costs that income is often paid to investors as regular distributions. 

Many leases include fixed annual rent increases or reviews linked to inflation. When the cost of living rises, rent linked to inflation rises with it, which helps stop the income being eroded over time. It's one reason commercial property is often described as a natural hedge against inflation, although the protection depends on the lease terms.  

Over a long holding period, those increases give rental income, and the distributions it funds, the potential to grow. Distributions aren't guaranteed and can change, as our article on income and growth explains.

The trade-off 

Unlisted commercial property has relatively low liquidity compared with investments like listed shares, and it isn't an asset class designed for quick wins. With value typically built over a longer horizon, investors need to be comfortable having their capital committed for years, rather than months. 

For many investors, that trade-off can be worthwhile as part of a diversified investment portfolio. Commercial property can provide regular income from long-term leases, exposure to a tangible asset and the potential for capital growth over time, with returns driven by different factors from other asset classes. 

Where a secondary market exists, investors may be able to offer their units or interests for sale to other investors, without the underlying property needing to be sold. This provides some flexibility if circumstances change, but relies on there being a willing buyer, so a sale at the time or price an investor wants isn't guaranteed. 

The right timeframe matters 

Before investing, the practical question is whether you're comfortable committing your capital for the longer term and whether that timeframe fits with your wider financial plans. If you expect to need ready access to your capital, an unlisted commercial property investment may not be the right fit. 

A longer timeframe is part of the nature of commercial property. Leases run for years, property markets move through cycles and changes made to a building can take time to show their value. Giving a commercial property investment time allows these fundamentals to play out, rather than making its success dependent on what the market happens to be doing at a particular point in time. 

Disclaimer: The information is general only and not financial advice. It is not intended as regulated financial advice under the Financial Markets Conduct Act 2013 and does not consider your specific circumstances. Oyster does not provide financial advice. Please consult a licensed financial advisor before making investment decisions.