Britons have had a long love affair with property – whether it’s the wish to own our own home or have a buy-to-let
However, as affordability has become a bigger issue, the government has started to reduce the tax advantages for landlords and stricter lending standards have been imposed.
The good news is, there are other ways to invest in property – and you don’t need a mortgage to do so.
Property funds can broadly be split into two groups: those that invest in physical property and those that invest in the shares of property-related companies.
The majority invest in commercial property rather than residential. Indeed, the only residential property fund I know (but like a lot), is TM Home Investor. This one-of-a-kind fund is the nearest equivalent to a buy-to-let: it buys and then rents out, two- and three-bedroom properties in the UK.
Commercial property is anything from an office building to a hospital, a warehouse to a leisure centre. This sector is closely linked to the health of an economy (which can be a blessing and a curse), but one advantage is commercial rental leases tend to be longer than residential ones. For example, Time: Commercial Freehold is a fund that owns commercial freehold ground rents with long leases (on average 64 years) used by Travelodges, David Lloyd gyms and Aldi among others, and 86%* of its holdings are also linked to inflation.
Janus Henderson UK Property is another physical property option. This fund’s vacancy rates are very low and the number of tenancies is in excess of 550**, spread across 77** properties, giving good diversification.
The disadvantage of commercial property – particularly for funds that invest in the buildings themselves – is they are very expensive (costing millions of pounds) and there are a limited number of buyers and sellers. So it can take a long time to buy and sell premises, and when many investors want to redeem their investments in a fund, it can lead to open-ended funds having to temporarily shut their doors. That means investors cannot get their money back for some time.
This can be frustrating, but is done to protect existing investors: it gives the fund manager time to sell buildings – importantly, at a better price – to meet those redemptions.
So another way to invest in physical buildings, but still guarantee you get access to your money, is via a commercial property investment trust. A trust is what we call ‘closed-ended’ as there are a limited number of shares. They are just like other shares traded on the stock exchange. So their value is not only linked to the underlying assets (in this case, buildings) they hold, it will also depend on investor sentiment: is the trust or sector popular or out of favour?
As trusts are closed-ended, the manager is not forced to buy or sell holdings – investors will simply have to sell their shares at a ‘discount’, sometimes a big discount, or at a ‘premium’. I like TR Property, a trust that invests around 10% in UK direct property, with the rest of the portfolio invested in pan-European property shares.
If you prefer to invest in shares, the other option is a fund that invests in property-related equities. This could be companies such as house builders, construction materials manufacturers and storage businesses.
You can often get more geographical diversification with these funds too, as many will invest in companies in Europe, if not worldwide. The Premier Pan European Property Share fund, for example, invests in both residential and commercial property-related shares listed in the UK and Europe. Shares are easier to buy and sell, but can be more volatile and will rise and fall in value like the broader stock market.
Outlook for property
Overall I’m cautious on the short-term outlook for property. The big risk remains Brexit and a potential slowdown in the UK. However, some longer-term trends are still very much in place. For example, companies continue to expand warehouses to service online orders, and all the time that the UK can offer world-class universities and education, student accommodation will thrive.
None of these options are risk-free, nor are they an exact substitute for buy-to-let investing. But for investors who may not have the capital (or inclination) to commit to a mortgage in current times, they are definitely worth considering.
**Source: Janus Henderson, 31 March 2019
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. The mention of specific securities is for illustration purposes only and not a recommendation to buy or sell.
Darius McDermott is managing director at Chelsea Financial Services and FundCalibre