Three alternative ways to invest in property
Following the introduction of the 3% buy-to-let Stamp Duty surcharge on 1 April 2016 which hit those purchasing second homes, becoming a landlord has become more expensive.
But the nation’s love affair with property still remains and investors are now seeking alternative ways to fulfil their desire for bricks and mortar, whether investing in physical buildings or in shares of companies which run properties.
Bricks and mortar
It’s important to note that property is an illiquid asset, which means it can be difficult to buy and sell quickly. Investors need only to remember the aftermath of the Brexit vote which led to a number of property funds suspending trading amid the flurry of redemption requests.
Despite this Darius McDermott, managing director of Chelsea Financial Services, says the recent events should by no means be a cue for investors to avoid the asset class altogether as property remains a valuable diversifier.
“It won’t always be the star performer in your portfolio, but it is traditionally uncorrelated to other asset classes and therefore offers something different to equities and bonds,” McDermott says.
However, he remains cautious on the outlook for the coming years as the UK looks to trigger Article 50 and says the London office space will come under pressure.
“You could still get low single digit returns though and an income, so while I wouldn’t necessarily add a lot to the asset class, I wouldn’t sell either. And there are property funds out there investing globally or in other regions, like Asia,” he says.
He picks the Henderson UK Property fund, citing the strength of its management team. He says: “Most leases of underlying holdings are linked to inflation – which is rising – and it has a higher than average occupancy rate.”
For Adrian Lowcock, investment director at Architas, one of the benefits of investing in a property fund is that it allows ordinary investors to pool their money with others so they can access the property market for as little as £50 instead of say £5m.
“Property fund managers tend to be experts in their fields and know the commercial property market in detail. This means they are well positioned to identify the most attractive assets and manage the purchase process and rental agreements with tenants. A skilled and time-consuming process for the average investor.”
He lists the Legal & General UK Property fund as it only invests in quality assets with strong tenant covenants and leases in areas with strong underlying economies. “The managers may make use of property derivatives, property securities and cash to manage liquidity within the fund,” Lowcock says.
He also picks Kames Property Income fund, which has some exposure to equities and was launched with the aim to buy secondary property from banks and other “motivated” sellers. Lowcock says: “The fund will have an opportunistic “active value” approach to property selection, including through change of use, new lettings, lease management as well as refurbishment.”
There are two ways to access shares; via a fund which invests in a portfolio of shares or you could buy individual companies that buy property directly.
This can include companies such as house builders and construction materials manufacturers, as well as listed Real Estate Investment Trusts (REITs).
McDermott cautions that in the short-term, “returns from these kinds of funds can be closely correlated to equities as holdings will be impacted by broader stockmarket movements”.
However in the longer-term companies’ earnings growth and returns should be more closely linked to the housing cycle or, in the case of REITs, “again to the underlying properties themselves,” he says.
“One fund that stands out is F&C Real Estate Securities,” he says. “It offers access to both the UK and major European listed property markets. It is slightly unusual in that it both buys shares in companies it believes will do well, and takes short positions against companies it thinks are not going to do so well to deliver returns for their investors in both up and down markets.”
McDermott also likes Premier Pan-European Property as the manager is “pretty bullish at the moment,”especially in Germany.
“As the yield on the bund has increased, investors have ditched property, but actually the spread is much better. There is a structural growth story in Germany as it costs more to build a property than to buy it! He also thinks UK property trust discounts are too extreme.”
Lowcock meanwhile likes the GCP Student Living fund. “GCP is a specialist investment boutique with particular focus on the UK social and economic infrastructure and student accommodation sector,” he says. “The Fund tends to offer a lower volatility property exposure with less sensitivity to the market due to its focus on student properties.”
He also lists MedicX, a specialist property trust investing in doctors’ surgeries. “The investment is a yield play (about 6%) as capital values should, and have, remained very stable over the long-term. The fund offers a steady income with some inflation protection which makes it well-suited to low-risk, income focused portfolios,” Lowcock adds.
Backed by property behemoth Zoopla, Bricklane.com is the first Property ISA of its kind in the market.
You can invest in existing housing stock in Manchester, Birmingham and Leeds from £100 via the recently-launched site which runs a new Regional Capitals fund.
The underlying fund is a REIT, which investors can hold either via its General Investment Account or via an ISA.
Investors own a share in the fund which holds residential property (not commercial property) and earn returns via rental income, as well as price increases in the value of the properties. You can choose to re-invest the amount or take the return as profit.
As the product allows investors to hold the REIT via an ISA, there is no corporation tax payable on property gains and rental income, and investors benefit from tax-free growth.
As with usual ISA rules, the maximum amount you can add each tax year is £15,240 (£20,000 from 6 April 2017) though previous years’ ISA amounts can be transferred. The property ISA will also be eligible for the new Lifetime ISA launching in April.
Bricklane says it has had customers transfer from low-interest cash ISAs to it, as its Regional Capitals fund is currently generating an average rental yield of 3.4% after all fees, costs and taxes, “which many investors are finding appealing in the current interest rate environment,”according to CEO, Simon Heawood.
However, the fund is subject to a platform fee of 2% of the total money invested and a 0.85% annual fee on total holdings, which is charged monthly. Bricklane also “reserves the right” in the future to charge a 0.5% Stamp Duty Reserve Tax (SDRT) on share sales from one party to another. Currently, it absorbs this cost from HM Revenue & Customs.
Points of note to investors include the fact that Bricklane runs a ‘two-week trading cycle’ which means it calculates the value of the fund each fortnight and uses this to calculate a share price. It then carries out a share issue to allow new customers to enter the fund.
For existing customers wishing to exit the fund, they need to be able to sell their share to a willing buyer at the end of each of this trading cycle. Bricklane adds that in the “exceptional circumstance that there’s a shortage of buyers, existing investors will have the option of waiting for a buyer in order to sell at market value, or offering them at a discount to incoming investors to sell them faster”.
Heawood explains how investors can make and lose money: “If values rise, customers’ investments grow further. In order to lose money, falls in the value of property would need to outweigh rental income generated. As is proper, risks are appropriately messaged throughout the site, and customers can’t sign up without acknowledging their understanding.”