Property Funds: Are they a good investment?
By Kate Saines
Like it or not, property is an incredibly popular asset.
There are a number of reasons for this, not least the fact that prices have soared over the last couple of decades.
But also because when it comes to investing, bricks and mortar is a tangible asset and unlike equities it serves the additional purpose of providing us with a home.
But being a homeowner comes with plenty of responsibilities – not least the financial ones. Whether you plan to live in your property or rent it out, direct investment has practical benefits but it comes with a lot of hassle too.
So for those of us who want to take advantage of the returns generated by the property market without having to worry about estate agents, stamp duty, solicitors and whether your neighbours are going to stick a 10 foot inflatable reindeer on their roof in December there's another way to cash in.
And that is to make indirect investments in property. There are several ways to do this and while it is almost certainly a more risky route than buying yourself a two bedroom starter home to rent out there are still certain advantages.
Property funds
You've heard of investment trusts, unit trusts and other collective investments. A number of these are set up to invest exclusively in commercial properties – and as investors we can buy a share of these funds and indirectly buy ourselves a stake in some commercial property.
The commercial property market is different to the residential market. Most commercial premises are let out to firms on long leases. It's typical for a company to rent their property out on a 25-year lease.
The value of these premises, therefore, will go up and down according to how much of the lease is remaining and how well, financially, the tenant is doing.
Properties being rented to a firm which is financially sound and with a long lease to run will be the most attractive prospect for a property fund manager.
Within the property fund world you can choose from a variety of different products. Funds tend to run along themes. For example, a fund might invest only in UK property. Or they might invest in property securities across the world.
Like any kind of investing, it always pays to do your research. There will be property funds which suit cautious investors and those tailor-made for people who like to take risks and potentially pick up bigger returns.
To give you an example of the types of property fund on the market, Standard Life Investments recently announced it was making a big acquisition to its UK Property Fund in the shape of the £20.6million Gateway Shopping Park in Wiltshire.
The commercial property is basically a collection of six retail warehouses, complete with car parks, which include shops such as Argos and Boots.
For Nigel Chapman, the fund's manager, the acquisition means his fund now has greater exposure to 'prime retail real estate'. He has diversified the fund to make it look more attractive to investors.
For investors it means they can invest in a commercial property, with some big name retailers inside. The fact the tenants are so well known highlights the point we made earlier about the success of the tenants. You would expect Boots and Argos to be pretty sound in this department.
The advantages of property funds are obvious. The fund manager does all the buying and selling for you, so all the hassle is taken out.
Likewise, as it's a pooled investment, there will be other properties within the fund. The more properties in different areas, leased to different types of company the more the risk is spread.
Watch out though as there are fees and commission associated with taking out these kinds of investments. A financial adviser will be able to talk you through these.
Of course UK commercial property has not been the most buoyant market since the credit crunch. But there are funds investing in other types of property.
Standard Life also runs the Select Property Fund, which invests in commercial property worldwide – this includes premises in places like Brazil. But it also provides exposure to property via specialist property products and stock exchange-listed property vehicles.
Meanwhile HSBC runs what is known as a multi-manager fund, the Open Global Property fund, which invests in lots of different property funds.
This will spread your risk even more as you will be investing in a stake of a variety of property funds, which have all been chosen based on their managers' performance.
Guy Morrell, manager of the fund, said: "Property has the ability to generate attractive returns and provides strong diversification qualities as part of a broader investment portfolio.
"Considering a global perspective though a fund of funds route, offers the potential to secure higher returns over the medium term and reduce overall volatility."
Real Estate Investment Trusts (Reits)
This is a relatively new way to invest in property. UK Reits were launched in 2007 to provide a way to invest in property assets indirectly and with certain tax advantages.
A Reit is basically a company which owns and manages property. The money to own and run these properties comes from shareholders – the people who pay to invest in the Reit.
To become a 'Reit' a company must be a listed property company – in other words it must be a public company listed on the stock exchange – and it must have gained itself Reit status, which means it must adhere to strict guidelines.
You can get hold of a list of all the companies with Reit status at the Reita website.
Reita is an organisation, part of the British Property Federation, which provides information on property investment.
To give you an idea of the types of firms that can be a Reit, the list includes companies like Big Yellow Storage, Capital Shopping Centres and Primary Healthcare Properties.
The beauty of Reits is that they are free from corporation tax. However, there is a conversion fee to pay and 90 per cent of its income must be paid to the shareholders.
The advantages of Reits over property funds is transparency. In other words, because they are public companies they are constantly scrutinised and it's very easy to find market data on them.
They also tend to be very liquid, which means the assets can be easily converted into cash. So, if you hold shares in a Reit you can usually sell them quite quickly if you need the money unlike Property Funds where the process can take much longer.
A boost was given to Reits in last month's budget, too, when the government announced proposals to reduce barriers of entry into Reits and also the abolition of some of the red tape.
Peter Cosmetatos, director of finance at the British Property Federation, said the proposals would boost investment in UK property and the scale of the UK Reits sector.
On the downside, it's important to remember that this really is a very indirect way of investing in property – more so than property funds.
Because while a unit trust is allowing you to buy a share in a physical property, a Reit is basically an equity.
Therefore a lot of the volatility you expect in the equity market may well occur in the Reits scene.
As with all investments, there are risks to both property funds and Reits and it's up to you to decide whether they are for you.
A financial adviser will take you through your attitude to risk and help you find the best property investment.
Use the Myfinances.co.uk comparison tools to find the right type of investment.
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