Investment insight: Property

Britain has a bit of a love affair with bricks and mortar. We view it like we do no other asset, assuming it will go up in value ad infinitum and allocating a far greater proportion of our personal wealth to it than anything else.

There is some reason behind this. Bricks and mortar have a physical form that everybody can understand and put in context. And the largest purchase in many individuals’ lives will be their own home.

But investing in property cannot be viewed in the same way. There are so many variables to consider aside from the romanticism of owning the place in which you live. If you are investing in buy-to-let, what about rental void periods? For commercial property, what if you cannot secure a tenant or the industry your property is suitable for collapses?

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For residential property investment, what if the market collapses again? All of these factors and more must be considered, if not directly but in how the fund manager will deal with them.

Going direct

Direct property investment provides limited choices. The first and most obvious is purchasing your own home. In this area, there are conflicting messages at play. On the one hand, house prices are starting to rise, with some saying we are already in the start of a bubble. This is largely London-based – in July 2013, the annual average house price in the region was 6.3 per cent up on a year ago – although it is starting to filter out to the rest of the country. On the other hand, the Bank of England (BoE) has said it has tools available to limit house price explosion if necessary.

Most advisers will say that home purchases should not be viewed as investments as such – after all, you have the additional benefit of living in the building – but may be taken into consideration when allocating asset percentages and exposure. Buy-to-let is another possibility, although if looking as a long-term investment, the potential for the base rate – and therefore mortgage rates – to rise should be accounted for.

Buying commercial property directly is another option, although it is only realistic for those with significant money to invest. While smaller commercial units are available, the real returns are in much bigger operations, often with specialist machinery. The large sums involved often mean commercial property is accessed through a self-invested personal pension (Sipp).

Unit trusts

For most, accessing property through a collective fund is likely to be most realistic and appropriate.

In the case of unit trusts, there is one specialist sector covering property. According to the IMA definition, funds in this sector must either hold 60 per cent of their assets directly in property of 80 per cent in property securities. Hybrid funds are permitted if they invest less than 60 per cent directly, but make the balance to 80 per cent up in property securities.

The sector is not broken down into geographical areas, with many funds opting for a global remit. As seen in Table 1, eight of the top 10 property funds over five years can invest worldwide.