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Kerb appeal of Property funds

This article is part of
Guide to Property Funds

Property funds allow investors to invest smaller amounts of money across a wider range of assets and provides greater liquidity should they wish to change their investment allocations.

Property funds are especially attractive to investors seeking a steady income stream, with dividends payable on a quarterly basis and some are even paid monthly, according to Guy Glover, manager of the F&C UK Property fund.

Mr Glover said with property funds a dividend yield of 5 per cent to 6 per cent a year is not uncommon.

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In an environment where the interest rate on savings is virtually negligible and gilt yields are around 2 per cent, Mr Glover said this was not a trivial consideration.

Over the last ten years, property has delivered an annual income return of 6.5 per cent a year, according to the IPD Monthly Index, and 6.8 per cent over the last year.

He said: “Investors seeking a degree of protection against inflation may favour property in uncertain times.”

Property funds are typically considered as an alternative to the traditional assets classes of equities, gilts and cash.

Traditionally they have been viewed as delivering higher returns than cash and bonds while being less volatile than equities.

However, Mr Glover pointed out his cannot be guaranteed in the future and over short time periods but the last year has confirmed this pattern.

In terms of time horizons, Philip Nell, manager of the Aviva Investors Property Trust, said property funds should be considered as a longer-term investment proposition as no matter what structure you are looking at, the real asset underlying this will be a property of some type, and properties themselves can be difficult to trade in terms of time and cost spent.

Mr Nell said: “Investors should be looking to invest for the medium to long-term and should ensure they understand the risks and investment objective and policy of the fund.

“They should ensure that investment corresponds to their investment objectives and financials needs. Broadly speaking, open-ended and daily priced authorised retail property funds may be suitable for investors who want to diversify their portfolio through investing in commercial property and who are aiming for a mix of income and growth from their investment.”

Each type of property vehicle has its own characteristics and Ainslie McLennan, director of property at Henderson, agreed investors should be clear about what they are looking to achieve when they invest.

He said: “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.”