However, after strong returns from both property share and direct property funds, the arguments for property are not as clear cut. Equally, there are a number of new choices for investors. In the current market environment, which type of property investment is likely to be the best choice for investors?
Property still divides into two basic types – direct and indirect – one holding bricks and mortar properties, the other holding shares in property companies, including Reits (real estate investment trusts). However, there are an increasing range of alternative options.
Investment trusts such as the Starwood Real Estate Securities and Custodian Real Estate have proved popular launches, both offering an alternative to conventional commercial property.
There are also a number of passive options, such as the BlackRock Global Property Securities Equity Tracker, which offer access to a basket of Reits.
Within the IMA property sector, property share funds have the edge in performance terms. No bricks and mortar fund appears in the top 15 funds over five years. This might be expected in a recovering economy, given that the equity market is forward-looking and is therefore likely to move ahead of true commercial property valuations.
However, Alex Ross, manager of the Premier Pan-European Property fund argues that there can also be structural reasons why property share funds can outperform on a total return basis: “Property funds tend to get significant inflows when property is rising. Therefore, they can be forced buyers in a high demand market and it can also work against you on the way down.”
There is also the argument that property share fund managers can be more flexible in their asset allocation. Commercial property is geared into the economic cycle, but different types of property are likely to perform well at different points in the cycle.
Property share funds can allocate more effectively between these different asset types – looking to secondary property later in the cycle or prime property early in the cycle. They can even look abroad. Mr Ross, for example, has a high weighting to the German property market. For bricks and mortar funds, it is difficult to make this kind of asset allocation shift swiftly.
Bricks and mortar fund managers, however, might argue that they have the edge when it comes to diversification and income.
James de Bunsen, multi-asset fund manager at Henderson, for example, is confining his property exposure to prime direct property, as an income substitute for parts of the bond market. “We have virtually zero exposure to investment grade bonds, where there is real asymmetric risk, and property offers a way to generate yield. Yields have fallen – from roughly 4.5 per cent to 3.8 per cent, but it still looks good relative to bonds” he says.
Within the IMA sector, the top yielding property funds are all bricks and mortar funds, which have an annual yield of between 3 per cent and 4.6 per cent. The property share funds tend to be total return vehicles rather than income focused.
The Premier fund, for example, pays 2.3 per cent, but Mr Ross says that he deliberately doesn’t focus exclusively on income-generative property because that would rule out a number of the asset management and development options for the fund, where an asset may be in an early stage of development and not yet generating income.
Bricks and mortar funds exhibit greater diversification characteristics than property share funds. Property share funds can be more highly correlated to equity markets, at least in the short term, while property bricks and mortar funds will exhibit less volatility and returns will have greater correlation to the economic cycle than other mainstream asset classes.
The popularity of the commercial property market has led to fears that it is overheating, certainly at the prime end of the market. “It is a crowded trade and we are mindful of that,” Mr de Bunsen says.
The right type of property investment depends on the type of investor. Bricks and mortar is a better fit for income seekers, and those in pursuit of diversification, while securities-based funds – whether active or passive – may be best for those looking for capital growth. Equally, there are new opportunities emerging that offer a different type of return altogether.
Cherry Reynard is a freelance journalist
Niche property options – Multi-manager
The popularity of the commercial property market has led to fears that it is overheating, certainly at the prime end of the market. This has led a number of multi-managers to look at more niche options in the property market.
For example, Rob Burdett (pictured), joint head of multi-manager at F&C Investments, has recently invested in the Custodian Real Estate Investment Trust, which invests in smaller properties, worth less than £7.5m.
He says: “This is a property investment as it used to be: it gets clients wealthy slowly. It won’t take more than 15 per cent gearing, whereas many trusts take as much as 40 per cent. It is quite conservative.”
Property fund picks
ABERDEEN PROPERTY SHARE
This £306.1m fund is managed by the Pan-European equity team at Aberdeen Asset Managers and is benchmarked against the FTSE 350 Real Estate index. It has delivered top-quartile performance against its IMA Property sector peers for one-, three-, five- and 10-year periods to June 13, according to FE Analytics. Its 12-month return of 17.83 per cent is roughly double that of the sector average of 8.38 per cent.
BNY MELLON GLOBAL PROPERTY SECURITIES
Managed by CenterSquare Investment Management (formerly known as Urdang Securities Management) this is one of the smaller members of the IMA Property sector with assets of just €8.3m (£6.6m). However, it has delivered top-quartile performance in one-, three- and five-year time periods, with a 12-month return of 18.47 per cent.
TR PROPERTY INVESTMENT TRUST
Managed by Marcus Phayre-Mudge and Alban Lhonneur this £827m company aims to maximise total returns by investing in Pan-European equities and UK direct property. It sits in the AIC Property–Securities sector, however it has delivered top-quartile performance in one-, three- and five-year time periods against the constituents of all five AIC property sectors, including a 12-month return of 37.91 per cent.
