Property as an alternative income investment

This article is part of
Guide to investing in property

Mr Norris says that while low bond yields have helped the specialist investment trusts, there are broader themes at play.

He says: “I think in future, general property company Reits such as British Land or Land Securities will struggle in future because the exposure they have is to retail and office space. The more specialist property investment trusts are exposed to long-term trends such as healthcare facilities, self storage units and warehouses.”

Michael Artbuthnot, chief executive of specialist property investment firm Catalyst says property investors should expect returns of about 8 per cent over the coming year, divided roughly evenly between income and capital growth.  

Paul Derrien, investment director at Canaccord Genuity Wealth Management believes that the present elevated levels of economic uncertainty mean property as an asset class that is sensitive to the wider economy, is much riskier now. 

He says: “There remain tough times ahead in this sector. Newspapers are full of renters looking for reduced rent costs, whether that is high street retailers, Travelodge, or restaurants.

"Many will not see out the pandemic once the life support is taken away, so investors need to be careful. Despite this, there are decent discounts in the smaller Real Estate Investment Trust (REIT) market where share prices have fallen, already predicting reduced income.

"At these low prices, these funds can be sensible income sources for the future. Do your homework on the properties in their portfolios and do not see these as alternatives to bonds, or as risk diversifiers.” 

Property as diversifier?

William Buckhurst, head of fund research and investment director at Vermeer Partners says: “In normal circumstances, property is a good diversifier to a portfolio of equities and bonds in terms of being able to provide relatively stable levels of income, even during times of an economic slowdown.

"The exception to that rule – and in our view close to what could be called a “black swan” event – is the current Covid-19 pandemic where many tenants have been unable or unwilling to pay their rents.

"This has been felt particularly hard in the office, retail and hospitality sectors. However, well-managed property funds with decent cash reserves that do not employ excessive levels of leverage will be able to ride out this income shortfall during what should be a relatively short-lived dislocation. 

"There may be longer-term consequences for office space where corporate tenants elect to review  the amount of space they require to house their workforce.