Property is a management-intensive real asset, meaning it requires considerable management time and resource, says Philip Nell, manager of the Aviva Investors Property Trust.
It is also a capital-intensive asset and so needs significant levels of ongoing investment over a building’s life cycle and so it can be difficult to achieve sufficient diversification in property portfolios for a small investor because of the relative indivisibility of asset ownership.
Property funds are generally easier to buy and sell than bricks and mortar, too, as well as spread or reducing the risks of direct investing through holding a number of assets.
They also have the potential to provide strong and stable income streams with the prospect of long-term capital growth.
Returns from property bring diversification as they have historically had a low correlation with equities and sometimes fixed income assets.
Long-term structure of leases on direct property funds of five years or more can also help to provide investors with a source of relatively secure income, in comparison to other asset classes, according to Ainslie McLennan, director of property at Henderson.
However, the sector can provide its own challenges as the asset class is also relatively illiquid as assets can take some time to sell, which can makes maintaining liquidity in an open-ended vehicle challenging in certain market conditions.
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 should investors wish to withdraw their money.
Investors in a closed fund have limited options should they wish to exit while unlisted funds have a small secondary market. Even open-ended funds can experience liquidity issues in times of market stress.
A listed fund’s pricing may be affected by the wider performance of the equity market as well as market conditions affecting property.
