Owning a physical property is good but entails a lot of expenses and big capital outlay. How viable are property funds instead?
PROPERTY AS AN ASSET CLASS
Relative to cash, bonds and stocks, property represents a medium risk investment potentially offering medium returns in the range of 6% to 8% p.a. over the longer term. Property can be used to achieve capital growth or income, or a combination of the two. Growth seeking investors should go for a horizon greater than five, possibly even 10 years relative to income seeking investors.
In this article, we will focus on the physical property funds, which manage a portfolio of individual properties and try to achieve returns by collecting rental yields and by capital appreciation of the underlying assets. A great advantage to an investor in comparison to owning an actual unit is that there are no day-to-day management issues, and there is a larger number of properties included such as residential buildings, shopping centres and warehouses so in that sense the risk is typically reduced.
Trading shares in a fund takes anything between a few days and a couple of months, whereas this isn’t the case with the physical assets. The legal side of owning a stake in a fund is more straightforward and there are no costly lawyers, banks and agents involved, whilst the returns are quite comparable. Often there can be tax benefits too.
[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”1,2,3,4,5″ ihc_mb_template=”1″ ]In comparison to the real estate investment trust (REITs) which invest into shares of companies involved in the real estate business, physical property funds are less correlated to stock market movements and offer better diversification in a portfolio. A disadvantage of a property fund in comparison to REITs, cash, bonds and stocks is lower liquidity; however, it is still more liquid than the actual physical unit.
KEY CONSIDERATIONS WHEN SELECTING A PROPERTY FUND
• Solid track record – one should look at the past performance of the fund and the fund manager’s experience and returns achieved over a minimum of 3 years. Also read about the manager’s insights and views on a particular market or sector the fund favours.
• Liquidity – it is better to consider daily traded funds even though monthly trading is quite common. Check information on the frequency of redemptions and any potential penalties!
• Reputable issuer – large and well-established companies offer more safety. Still, do not ignore niche fund houses as there may be great potential too, just make sure you do extra due diligence.
• Underlying business and its sector – keep in mind that some sectors like manufacturing or logistics might be more sensitive to economic fluctuations than others (health care sector). Also make sure that the region the fund invests in has positive economic forecast regarding the real estate market and in general.
• Dividend yield – look for sustainable dividend growth which is achievable over the long term. This is not only a consideration for income investors as solid yields are a sign of stable cash flows.
OUR RECOMMENDATIONS
Henderson UK Property Fund – this is a flagship fund of Henderson Global Investors which manage around £81 bn of assets. The fund itself is worth more than £4bn. Its main focus is to generate compelling income and rental growth opportunities, it was ranked third in the UK property market in 2015 returning 12%. The fund primarily invests into retail and offices located predominantly in the London urban area. Additionally, the fund is daily traded which is quite unusual for the majority of physical property funds. Experts predict another great year for the UK property but double digit returns may be left out this time.
Coral Student Accommodation – the student hospitality sector has gone through a significant upswing over the last years. The good times do not seem to be over yet especially as the number of international students in higher education in the UK is expected to grow by 15%-20% over the next five years and the market is still seen as structurally undersupplied.
According to Knight Frank, total returns in the student accommodation sector have outperformed all other traditional asset classes, and this has been the case since 2011. The Coral fund is a specialist property fund that favours this niche market. Sometimes outstanding opportunities await those ready to move away from traditional solutions!
The aim of this article is to highlight an alternative way to invest into property without the need for outright ownership. Astraasia can offer clients discounted access to the most respected fund managers with regard to property and equity funds.
Disclaimer: The views expressed here are entirely the contributor’s and Asian Property Review and its associates will not be held liable for any losses arising from the recommendations here. Readers are advised to seek independent advice before making any investment decisions.[/ihc-hide-content]
James Hartland has been involved in property investment in the UK, Europe, Middle East and the Philippines. He can be contacted at j.hartland@astraasia.com www.astraasia.net