Should you invest in property?

Published by Rob Griffin on 29 July 2015.
Last updated on 29 July 2015

House with coins

As is so often the case, the truth lies somewhere in between.

While property can act as a useful diversifier in certain situations, there are many issues for potential investors to consider before they commit money to the sector.

Arguably, the most important is knowing the difference between the two main types of property funds. On one side, you have those who buy actual bricks and mortar, and on the other you have those who invest in the shares of property-related companies.

The direct property route provides more diversification, along with the prospect of rising rental income and capital appreciation. However, this is counterbalanced by high transaction and maintenance charges, as well as the possibility of void periods when properties aren't let.

Buying the shares of property- related companies, meanwhile, means you'll be as susceptible to the vagaries of the stockmarket as you would in other equities. Prospective investors, therefore, must consider what type of exposure they would prefer.

They will also need to establish how it's run. For example, is the fund's focus on the UK or other global markets? Does the management team possess the necessary experience and track record to give you confidence it will make the right calls?

Change in conditions

The sector has also endured a variety of conditions over the past decade. During the boom times, for example, it benefited from companies looking for space in which to expand, so putting your money into funds that owned such sites was a lucrative decision.

Then came the global financial crisis. The world became a different place, with businesses suffering severe financial problems and investors taking fright.The end result was that investors switched their money into what they perceived to be safer areas.

However, the market has recovered. As corporations have begun to prosper once more in an environment of historically low interest rates, the world of commercial property has started to look more attractive once again.

This is illustrated by the annual IPD UK Annual Property Index, which shows impressive returns of 17.8% for 2014 – up from 10.7% the previous year and 3.4% in 2012. When you consider it stood at -22.1% in 2008, you can appreciate how far property has come.

It's a trend that appears to be continuing. In fact, transaction volumes for UK commercial property hit £19.1 billion in the first quarter of 2015 – second only to the record set in the previous three months, points out Stephen Rees, head of real estate at Coutts.

"This figure was driven by a surge in student accommodation and hotel deals," he says. "Low interest rates, favourable returns relative to other asset classes and the UK's reputation as a safe haven all helped boost transactions."

Stay cautious

Although Rees believes high employment and a buoyant economy will support rental growth, he warns investors should be cautious when yields are so low that there is limited scope for them to be compressed further through rising capital values.

"We still see commercial property as an attractive asset class," he says. "The latest RICS Commercial Property Market Survey suggests that confidence in the UK economic outlook remains healthy, and that 2015 will be another good year for property. We concur."

Enthusiasm for property funds has also returned. Back in February, for example, it was the best-selling asset class with impressive net retail sales of £304 million, according to figures compiled by the Investment Association.

There is now £26.5 billion invested in the property sector, equating to 2.7% of total funds under management, according to figures compiled by the Investment Association to April 2015. More than £5 billion has been invested over the past year.

Unsurprisingly, financial advisers and industry observers are divided when it comes to the outlook for the sector. For example, Andrew Merricks, head of research at Skerritt Consultants, is steering clear of the area at the moment.

"I'm not a fan because yields are still struggling and the sector is also susceptible to rising interest rates," he says. "The UK market may also suffer if foreign owners decide to sell, as much of London is now owned by overseas investors."

However, David Penny, managing director of Invest Southwest, describes himself as "moderately optimistic" about the prospects for commercial property and suggests it should deliver good, solid returns over the longer term.

"Property can be used to provide diversification," he adds. "Our clients tend to be concerned about losses, so diversification across the asset classes is in my view the most effective method of protecting against large fluctuations."

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