Passive way to invest in property

The net retail inflows of £304m show the continued popularity of the sector that has seen positive inflows every month for the past year, ranging from £235m to £505m.

It is perhaps unsurprising that property is finding its way into passive as well as active products, with BlackRock launching the iShares MSCI Target UK Real Estate Ucits ETF (exchange-traded fund) in March, with the aim of “accurately reflecting the characteristics of physical real estate while preserving the liquidity and ease of access of a Reit [real estate investment trusts]”.

This is not the first property ETF, however, with research from consultancy ETFGI noting there are currently eight real estate ETFs or ETPs (exchange-traded products) with a primary UK listing.

In terms of how they actually work, Michael Mohr, head of exchange-traded product development, EMEA, Deutsche Asset & Wealth Management, explains ETFs tend to track the performance of the underlying property index by either physically buying and holding the securities in the index, or effectively subcontracting out the index tracking to a bank, by buying an index swap to get the returns. He adds that both methods can work well, producing products that reliably track their indices.

The question, of course, is what index should they be tracking and does it provide the right exposure for the investor.

Tom Fekete, head of product for iShares EMEA, says: “In the current low-interest rate environment, the search for yield remains a priority for many investors. Real estate has become increasingly important as a source of income and is a popular diversifier in portfolios.

“Traditionally investors have gained access to the asset class by investing in physical properties or Reits, but both of these options have challenges. For example, Reits do not closely replicate the behaviour of physical real estate, whilst physical property requires a large initial investment and investors can be faced with high transaction costs.”

But as investing in property on an active basis can have its drawbacks, how easy is it to invest in real estate through a passive vehicle?

Mr Mohr says: “Investors have to keep in mind that they are investing in commercial property companies, which means they are not getting a ‘bricks and mortar’ investment in the way that, say, a buy-to-let investor who directly purchases property gets.

“The performance of investment property companies is linked to a number of factors, such as occupancy rates in office space and the macroeconomic picture, but also company-specific drivers such as the individual level of debt. The benefits are liquidity – direct investors in property are stuck with illiquid assets – and the opportunity to get diversified exposure to the property sector. On top of that, Reits tend to be stocks with a relatively high dividend rate.”

Investing in vehicles tracking Reits seems to have been the most popular method for passive property exposure, but as Mr Fekete points out there are also downsides.

“Until recently, the only real estate ETFs available were those providing exposure to Reits. Whilst they provide exposure to the property sector, they can also show significant correlation to equity markets and the volatility associated with them.”

Investing in property through ETFs is therefore not a new idea, but the increasing interest in the asset class by retail investors could perhaps spur an evolution of the products available.

Deborah Fuhr, managing partner at ETFGI, says: “I think property ETFs have been around for a long time, probably not dissimilar to fixed income. For many investors when they think about property, especially retail, they prefer to invest in physical property, so flats or something that you can touch or feel.

“I think it’s a question of investors becoming aware of the different types of property securities out there. You have listed real estate companies, you have Reits, and the indices can be quite different, [so] for investors… education is needed to develop a better understanding of what’s available.”

Nyree Stewart is features editor at Investment Adviser