Are property shares an efficient way to invest in the asset class?

This article is part of
Guide to using property to fund retirement

Are property shares an efficient way to invest in the asset class?

After the uncertainty caused by the outcome of last year’s referendum on EU membership, investors quickly began to pull money from UK commercial property funds.

This run on the asset class not only triggered a review by the regulator but more generally reignited the debate over the illiquidity of property funds.

Investors still keen to get exposure to property may find investing in shares, or real estate investment trusts (Reits), will allay some of their concerns around liquidity.

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Alex Moore, research analyst at Rathbones, says: “Property shares and Reits can provide an investor [with] a quicker and relatively inexpensive way of gaining exposure to different types of property, compared to holding property assets directly.

“Certain types of property such as offices and shops require large amounts of capital and technical expertise. By purchasing a share in a company or Reit, you are effectively paying someone to manage property for you, while you get a share of the underlying property’s earnings stream.”

Gaining popularity

Those who rushed to exit property funds in the wake of the Brexit vote may have been piling into property investment trusts.

The Association of Investment Companies (AIC) reports the Property Direct – UK sector was the most popular sector for adviser purchases for the second half of 2016 and the second most popular sector during the first quarter of 2017.

Figures from the AIC also show of the fastest-growing investment trust launches over the past five years, four of the top five sit in the Property Specialist sector.

The AIC notes Tritax Big Box REIT has increased in size the most, with a 979 per cent increase in assets under management since it was launched in December 2013 and a share price total return of 64.39 per cent from launch to the end of June 2017.

The next three investment companies with the highest percentage increase in assets under management from the Property Specialist sector are Empiric Student Property, GCP Student Living and Target Healthcare REIT which have each increased their assets under management by 650 per cent, 631 per cent and 522 per cent respectively, the AIC reports.

CompanyLaunch dateTotal assets at launch (£m)Total assets at 30/06/2017 (£m)Total assets % increaseDividend yield as at 30/06/2017 (%)
Tritax Big Box REIT09/12/2013      2002158.2979.10%4.4
Empiric Student Property30/06/2014      85637.3649.78%5.5
GCP Student Living20/05/2013      93680631.18%4
Target Healthcare REIT07/03/2013    45.6283.5521.71%5.3

Source: AIC

This is not to say Reits were not affected by the referendum - many of them continue to trade at a discount to net asset value and so can be picked up fairly cheaply.

But as Annabel Brodie-Smith, communications director at the AIC, explains: “The closed-ended structure of investment companies is particularly suited to illiquid alternative assets. This has been emphasised by the problems suffered by the open-ended property funds after the Brexit vote.

“Investment companies are listed companies on the stock exchange so investors can always buy and sell shares freely. Investment company managers do not have to manage inflows and outflows and can take a long-term view of their portfolios, without being constrained by the illiquid nature of the asset class.”