Friday Highlight  

Differences between commercial and residential property investing

This steady demand helps deliver the kind of reliable, sustainable income that many investors crave.

The need to satisfy that demand is attracting a growing number of institutional investors to the market, recognising that residential property isn’t subject to the pressure that areas of the commercial property sector are under.

We’re in a low yield, low growth environment in which there is growing uncertainty about the outlook for markets, with indications that we’re nearing the end of the bull run that began in 2009.

Property is well positioned to provide long-term investors in particular with the diversification and income they need.

Residential property remains relatively peripheral as an asset class, but that will change as policymakers turn increasingly to private and institutional finance.

Property funds

Retail investors will have been familiar with the many funds offering commercial property as an asset class and seen housing through the lenses of buy-to-let and owner occupation, so they may well view residential property as presenting the same opportunities and risks. 

That’s not quite the case, however, and the different characteristics of each suggest that combining the two within multi-asset portfolios provides the potential for robust risk adjusted and uncorrelated returns.

By splitting bricks and mortar property funds from those that invest in property securities, the IA’s new property sectors should make it easier for investors and advisers to research different options.

However, even within the new UK Direct Property sector, there will be significant variation, with some funds investing across a range of commercial property types, while others target specialist sectors like residential property or student accommodation.

Understanding the composition of a fund is therefore crucial before making direct comparisons, even between bricks and mortar products.

Alan Collett is a fund manager at Hearthstone Investments