PropertyAug 10 2017

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

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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.

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.

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.Annabel Brodie-Smith

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.”

Emergency exit

It’s a feature that may appeal in particular to those who would like to be invested in property as part of their retirement portfolio.

The last thing those who are approaching or at retirement need is for another run on property just as they are about to access their investments.

Alex Scott, deputy chief investment officer at Seven Investment Management, points out some of the other attributes of property shares.

“Stock exchange-listed property companies, including Reits, offer a more suitable structure because managers can take a long-term view of the market without the worry of potential investor redemptions, and without having to run significant amounts of cash – property can’t be sold overnight, after all,” he points out.

He acknowledges the structure is not perfect and discounts might widen significantly but adds “at least there’s an emergency exit if you need one”.

A Reit is obliged to pay 90 per cent of its taxable income to its shareholders, so depending on the underlying strategy, property can be income generative to the end investor.Alex Moore

Mr Scott continues: “Stockmarket listed property companies can also borrow to help finance property assets, which can help improve total returns, and many listed property companies look for additional gains by developing or redeveloping property assets – these strategies are generally much harder to implement in open-ended property funds.”

This can add an extra layer of risk though, he notes, as some of the gearing levels can be high and are worth scrutinising. 

“Still, we find listed property companies to be a more appropriate way to invest in real estate in general,” he concludes.

Certainly, property shares do allow investors to get exposure to property, whether that's residential or commercial, without relying on a single property purchase for their retirement.

Property shares can be held in a self-invested personal pension (Sipp), for instance.

Tom Selby, senior analyst at AJ Bell, suggests: "For most people a pension is going to be the best starting place when saving for retirement – you get tax relief, an employer contribution in the workplace and if you want exposure to property you can get that through Reits or property funds."

He points out a pension also has the benefit of allowing investors to pay in small amounts, whereas a direct property investment requires a significant upfront deposit payment.

“While commercial property funds suffered post-Brexit, with a number imposing suspensions, a pension is a long-term investment and so a relatively short-term measure such as this should not be too much of a concern for most people. If it is, a Reit is a good alternative option," Mr Selby adds.

Property shares can also be a useful source of income which, for income-starved investors, is welcome news.

The data (above) from the AIC shows the four recent Property Specialist sector launches are all yielding 4 per cent or more.

“Historically, the majority of the asset class’ total return has come from rental income relative to capital gain,” says Mr Moore. 

“A Reit is obliged to pay 90 per cent of its taxable income to its shareholders, so depending on the underlying strategy, property can be income generative to the end investor.”

Economic outlook

What about the wider outlook for property, given the government is only a few months into official negotiations over the UK’s departure from the EU?

Richard Gwilliam, head of property research at M&G Real Estate, forecasts: “With the economy continuing to grow, investors should be comforted by the rental fundamentals of real estate, which benefit from ongoing (albeit softer) occupational demand and, for most markets, a lack of significant supply of space.

“UK property offers attractive yields, compared to both other asset classes and to other property markets globally. The renewed cheapness of sterling also boosts the UK’s attractiveness to foreign investors.”

He suggests: “The election result does not change our belief there will continue to be investor demand for core real estate in the UK, and the weaker pricing for riskier secondary assets should provide interesting opportunities for some investors.”

eleanor.duncan@ft.com