Suitable investors in a property fund

Mr MacTruong says investing into the property sector for the long term has the additional benefit of providing some protection against inflation eating away at the real value of money, making it a sound defensive investment.

He says property funds are not likely to be an appropriate investment for short-term tactical investors due to the high operating costs and illiquid nature of the sector.

Mr MacTruong says: “A property fund can be a good diversifier for a balanced portfolio as they have traditionally generated returns with a low correlation to those of equities and bonds.

“Importantly a significant part of the return on commercial property comes as an attractive income stream and this provides investors with a secure and stable cash flow whilst giving them a form of protection as distributions are currently above the rate of inflation.

“Also diversifying your portfolio with a property investment should reduce volatility, which is likely protect your capital and generate more consistent returns over the long term.”

While a robust, growing income has been the main driver of commercial property returns over the long term, making it popular with income investors, Ainslie McLennan, manager of Henderson UK Property Oeic, says the asset class also offers the potential for capital growth, should the underlying properties increase in value.

Mr McLennan says: “A commercial property fund that consists of good quality, well located and properly managed assets should provide a robust rental income that can grow at an attractive rate over the long term.

“Commercial property is an important asset class to consider as a means of diversifying risk in a portfolio.

“Commercial property generally has a low correlation with most other asset classes, such as equities or bonds, although broader economic factors, such as interest rates changes, can have an impact across asset classes.

“Each type of property vehicle has its own characteristics and investors should be clear about what they are looking to achieve when they invest.

“Bricks and mortar property funds, for example, have a stronger focus on income, while Reits and property securities can often generate stronger returns in a rising market, but can be more volatile.”

In terms of the part a property fund should play in an investor’s portfolio, Chris Ludlam, head of real estate capital for Schroder Property Investment Management, says: “The nature of the asset class means that an investment in property should be considered as both long term and strategic and our experience is that allocations of 5 per cent to 15 per cent are typical for many investors who are seeking a blend of capital growth and income.

“In a low interest rate environment, it may be sensible for lower risk investors with a requirement for income to have a slightly higher allocation to UK property at the expense of bonds, provided they have a three to five-year investment horizon.

“Medium and higher risk investors often allocate as much as half of their total property exposure to global property securities to target higher returns and global diversification. A more global approach has long been embraced by investors in equities and bonds.”