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Guide to Property InvestingPros and cons of different types of property fund
When it comes to residential property funds, Philip Nell, head of European retail funds for real estate at Aviva, says advisers should always remember that their clients already have exposure to this market from their existing holding in their own home.
Mr Nell also points to the illiquid nature of the assets as a key negative possibly leading to fund suspension for open-ended funds, as assets may not be able to be liquidated quickly enough to meet redemptions in a rapidly falling market.
Ainslie McLennan, manager of Henderson UK Property Oeic, agrees and says it is therefore important that a property fund has good liquidity in terms of the quality of its portfolio, and sufficient available cash to be able to meet redemptions.
Hugh MacTruong, proposition manager of Legal & General Investments, concurs, adding: “This [liquidity crisis] happened to a number of established UK commercial funds following the crash in 2007 to 2008, which is why it pays to look into the history of the fund manager.”
Mr Nell continues that advisers should expect to see relatively high management costs that can eat into income yield and relatively large transaction costs such as 5.8 per cent on purchases and 1.5 per cent on sales.
For listed Reits, Mr Nell says there is short-term correlation that is closer to equities than direct property, as well as ‘gearing’ (borrowing) leading to increased volatility and some stocks have very limited liquidity.
The potential downsides of borrowing - or at least over-use thereof - were shown buy the recent demise of the Invesco Property Income Trust, which collapsed with a likely 100 per cent capital loss.
On the plus side, Mr McLennan says a characteristic of the UK commercial property market is that leases are often structured with upwards-only rent reviews, or tied into movements in the retail price index, which can provide some protection from the effects of inflation.
Mr MacTruong adds that commercial property provides a large investment universe that varies greatly in geographical and building type covering traditional investments in offices, the high street, leisure and industrial sectors along with more specialist types of properties.
The large pool of diverse properties helps to spread portfolio risk within the sector and UK commercial property funds provide an easy and low level entry for investors to access this risk diversification.
At a strategic level, he says commercial property funds also bring the benefits of diversification to an investment portfolio, providing an alternative source of return that has a low correlation to equity markets, as well as historically lower volatility.
Obviously, of course, there is the aforementioned existing exposure to property for most investors to consider.
Another attractive attribute of UK commercial property funds, according to Mr MacTruong, is rental income and he says this is a key driver of long-term returns and provides a base level of return during challenging times.
This income is often cited as a key reason for the interest in property now, at a time when equities are persistently volatile and the risk/return balance on bonds remains questionable.
Mr MacTruong says: “Fund managers have the ability to enhance income not only through property selection, but also through active asset management such as refurbishments and the added value they can bring regarding resale value and rental.”
Eugene Philalithis, portfolio manager at Fidelity Solutions, says: “In the context of today’s markets, where the hunt for income remains a priority for many pension fund investors, it can be tempting to plunge into the individual asset classes which appear to offer the highest yields.
“But the income from different asset classes will fluctuate over time, so long term investors can benefit from a multi-asset approach, which gives access to a wider range of income streams and opportunities.”
