BLOG: The diverse art of property investing
It’s also a topic that’s guaranteed to divide opinion. Ask 20 people their views and you’ll have as many predicting valuations are set to rocket, as warning a slump is on the way.
The same can be said for property market data – where monthly statistics always divide opinion.
So, what is the reality? Here we take a look at the various ways that you can invest in the asset class and the potential risks you need to consider.
Property as an asset class
Property appears to be a simple asset class but it’s actually relatively complicated. There are many ways to get exposure – and the risks and rewards will vary.
The potential benefits of each approach will also differ. For example, owning an actual building may provide a different type of return than other assets you own. This can help diversify your overall portfolio – especially if it largely consists of company shares and is subject to stock market volatility.
Therefore, deciding whether property is right for you will depend on your existing holdings, the available budget, your longer-term investment objectives, and risk appetite.
Your investment time horizon is also important. For example, can you afford to wait 30 years for the value of a particular property to rise or do you need to earn a regular income?
Below are a few ways to tackle the property market.
Direct property – this means buying buildings! For example, the house you live in may hopefully rise in value over time. According to the latest HM Land Registry data, valuations increased 10.6% over the year, meaning the average UK house cost £264,000 in August 2021 – £25,000 higher than the same point in 2020*.
Then there is the residential buy-to-let market. The hope here is you buy a second property and get the double-whammy of price increases and a rental income from your tenant.
You could also buy commercial property – the likes of a shop, workshop or warehouse – then lease it to a business.
There are other issues you have to throw into the mix – these include the taxes associated with buying the buildings, and maintenance. Last, but by no means least, is demand – this is what makes the location of your property crucial, as does the economic backdrop. For example, demand for office space has fallen due to Covid-19 with many of us working from home.
However, capital values increased 1.6% across all UK commercial property in September 2021, according to the latest monthly index of property advisor CBRE**. “This is the highest All Property capital growth figure since June 2014,” it states.
Property securities – In addition to buying physical buildings you can also buy the shares of companies involved in the property market – firms like real estate companies, builders’ merchants, online estate agents and home improvement businesses all fall into this bracket.
You can opt to buy shares in individual companies. However, it’s worth bearing in mind that you’ll be concentrating your risk on a handful of names. Share prices can be extremely volatile, and the value of your investment can move dramatically on company announcements and external factors like interest rates.
How to go about investing in each segment?
Of course, not everyone has the budget to buy actual bricks and mortar. But the good news is you can still get exposure to property via specialist funds that have millions of pounds at their disposal.
This is where investment funds have a particular role to play. An example is the Janus Henderson UK Property fund, which is run by Ainslie McLennan and Marcus Langlands Pearse. This portfolio provides core exposure to the UK commercial property market, while retaining a significant allocation (currently 15.7% of the portfolio***) to cash for liquidity purposes.
The remaining 84.3% of the portfolio is invested in physical property – with a bias towards sites in the South East of England. In the past five years it has returned 24.5% with a yield of 2.5%****.
An alternative is the Time: Commercial Long Income fund, which targets stable returns by primarily acquiring commercial freehold ground rents and properties. Top names in the portfolio include the likes of DHL in Manton Wood and Morrisons in Birtley. It has returned 14.5% to investors in the past five years with a 3.6% yield****.
It’s worth noting not all property funds will buy actual buildings. There are portfolios that buy into a wide variety of property-related securities.
The BMO European Real Estate Securities fund, managed by Marcus Phayre-Mudge and Alban Lhonneur, provides access to a portfolio of securities listed in both the UK and Europe. Among its top 10 holdings is British property investment and development firm Segro. Another offering access to both direct property and securities is the TR Property Investment Trust, also managed by Phayre-Mudge. The pair have returned 74.1 and 106.1% respectively in the past five years.
*Source: Office for National Statistics, UK House Price Index: August 2021
**Source: CBRE, Q3 2021 report, 11 October 2021
***Source: fund factsheet, 31 August 2021
****Source: FE Analytics, total returns in pounds sterling, figures from 16 November 2016 to 16 November 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
Darius McDermott, managing director of Chelsea Financial Services and FundCalibre