Defaqto Guide to property Funds
Property investment is relatively self explanatory, in that for the retail investor, it is an investment in a share of a portfolio of buildings, usually of a commercial nature. Property is perhaps a little more 'mainstream' than other alternative investments but nonetheless it has not been as easily accessible as the more traditional assets. It has only recently been included as an asset class within many of the industry available asset allocation tools, and it is only the advent of NURS regulation that has allowed authorised collectives in the UK to invest directly into property.
Property investment techniques
Under the broad heading of 'property' there are several ways of accessing this asset class in the UK.
Open ended fund
Open ended funds can invest directly into properties under NURS regulations as well as listed securities. The fund valuation reflects the current capital value of the properties themselves, while the yield reflects the current rental receipts.
Closed ended trusts
There are the closed ended trusts, which are listed securities dealt on the Stock Exchange, such as Real Estate Investment Trusts (REITs). Although broadly reflecting the value of the underlying assets and the income received from them, the price will be subject to the pressures of supply and demand and as such may pre-empt the direction of the market. In general, these vehicles are more liquid as market conditions are reflected in the price.
Property securities funds
There are also property securities funds, which do not invest directly into 'bricks and mortar', but reflect the fortunes of the property market by investing in associated industries such as property developers and builders. These are basically equity funds and have been used as a proxy to direct property investment for many years.
There are other investment vehicles that are designed to perform in line with a property index, such as Exchange Traded Products (ETPs) and some structured products will follow a property price index
At a basic level, there is a certain comfort in owning tangible assets or 'bricks and mortar', which other asset classes don't allow. Historically, property investment has had a low correlation to the other main asset classes. It was a sensible strategic addition to investment portfolios to alter their risk profiles. Until recently one of the few ways to access direct property investment, short of buying a building, was through life and pensions products, and even here availability could be cyclical. There is now a much wider choice.
Returns over time, however, from commercial property in particular, come largely from rental income. If, on average, the portfolio of properties held was on a long lease, this lent a certain security of return. A better quality tenant will also give more security.
A flexible asset class
There is a wide range of vehicles and methods of participating in the property market outside of the traditional 'bricks and mortar' route, each reacting differently, and at different times to market conditions.
Within this asset class there is a wide variety of opportunities that should be considered.
While most commercial property funds tend to invest domestically, there are those that invest globally. This adds another element of diversification to portfolios, although at the same time adds another level of research and expertise required by the property team.
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