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?
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.
The top spot was more geographically focused, however, and taken by the Henderson Asia Pacific Property fund, which returned £1,628 on an initial £1,000 over five years. This is particularly impressive when compared with the overall sector average of £1,162.
The portfolio is relatively concentrated, holding only 26 different stocks. It has quite hefty exposure with its top two holdings – both at 9.6 per cent of the portfolio – of Mitsubishi Estates and Mitsui Fudosan. This goes some way to explaining its high volatility of 17.3, meaning a bumpy ride for investors. It has, however, also outperformed the average over one year, returning £1,232 on £1,000.
Closed-ended
While there are 40 property open-ended funds, there are 59 investment trusts available spanning four categories: Asia Pacific, Europe, UK and Specialist. A benefit of property investment through investment trusts is that they can use gearing, borrowing to buy additional properties for greater growth or income. The closed-ended structure also allows managers to take a longer view without worrying about shareholders withdrawing funds.
The top performing investment trust over five years completely overshadows the top unit trust, with a whopping return of £3,601 on an initial £1,000. The New Europe Property Investment trust has £426.4m in assets under management and utilised 25 per cent gearing in 2012. Its portfolio includes numerous shopping centres, with big-name retail tenants, alongside office space and a small allocation to industry.
But not every trust fared so well. Over five years, the average property trust lost £74 on an initial £1,000.
Real estate investment trusts (Reits) are another option for property investment. According to the British Property Federation (BPF), there are 28 Reits in the UK with a total market cap of £27.9bn.
Most UK Reits focus on property within the country, although some hold European investments. Once a Reit has paid a conversion fee, it does not have to pay corporation tax. It must pay out 90 per cent of its property income to shareholders.
According to the BPF, investing in a Reit is significantly more volatile than direct property or unit trusts and the vehicles perform more like equities than property. However, it says, in the long term the performance of Reits is more closely correlated with property than equities.
Making the right choice
There are multiple ways of investing in property. Choosing the right type for your client is not as simple as allocating a percentage to property; there are many access routes that may or may not be suitable. And going global requires an understanding more broad than just what is happening in the UK.
Five questions to ask
1. What investment structure is best? Direct, open-ended and closed-ended options all have different pros and cons. Look in detail before taking the plunge.
2. Is there any crossover with existing funds? Multi-asset funds in particular are likely to have an exposure to property. Double-check that overall exposure won’t be too high.
3. Is UK or global more appropriate? When looking at Reits, UK-focused trusts are more common, while unit and investment trusts have a much broader remit.
4. Are the fundamentals sound? Nobody wants to another property crash to happen, but finding a manager focusing on sustainable business models can be something of a buffer for long-term value.
5. Is liquidity a problem? When the financial crisis hit, many investors were forced to either hold on to lower-value investments and hope for a recovery or sell out at a lower price. This adds in a layer of risk as property is complicated to sell and prices do not generally bounce back quickly.
