Why you should consider Property as an asset class for your Investment
The Chart below:
- should make the case as well as anything for property as an appropriate long term investment for your retirement arrangement and for your personal portfolio; and
- shows the performance of UK property (IPD Index) compared with equities (MSCI World Index) and bonds (Barclays Global Treasury Index) over a 20 year period ending March 2017.
Property is arguably a more complex investment in comparison with most other asset classes for reasons of regulation, low liquidity, the requirement for management and the legalities around leases, ownership, etc. However, it is the income generating potential of property which is its standout feature and above all property should be viewed as a long term income generating asset. Property is also a cyclical asset class and values will ebb and flow depending on a number of factors including interest rates, the economic backdrop, the availability of finance as well as simple supply and demand. As a result market timing can be important, although less so for long term investors.
Our advice seeks to optimise the investment returns through identifying a suite of investments from our list of recommended funds reflecting our clients’ personal circumstances and preferences. As advisers, we are strong believers in the appropriateness of property as a core asset for our clients’ retirement arrangements and personal portfolios. However, while retirement arrangements and personal portfolios should have an exposure to property, it is not advisable for it to be the dominant asset. Our recommended ranges for property for each Risk Category are as follows:
| Very Cautious | Cautious | Balanced | Aggressive | ||
| 0% to 15% | 10% to 20% | 15% to 30% | 0% to 10% |
In addition, there are myriad ways to gain exposure to property and all routes should be considered with one of our advisors before making a decision. The following paragraphs contain brief descriptions of the more popular ways to achieve property exposure, many of which are on our list of recommended funds:
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Property Funds.
Property funds allow investors to participate in commercial property and in turn investors get units or shares thereby giving them indirect ownership over numerous properties in different locations. Property funds are usually liquid, some pay distributions to investors and are a popular way to gain exposure to property. The providers are regulated i.e. banks, investment managers and life assurance companies. In addition the funds are regulated e.g. regulated as a Real Estate Alternative Investment Fund (AIF), a Qualifying Investor AIF, etc. Different investing and borrowing rules apply depending on how the fund is regulated i.e. only some funds are permitted to contain debt and that debt can be limited to a specific percentage.
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Real Estate Investment Trusts (REITs).
REITs are stock market listed vehicles which hold a basket of property assets which may be located in one or more jurisdictions and may hold one or more property types (commercial, residential, etc.) or may offer exposure to property within a particular sector such as healthcare. They usually carry at least some debt but are highly liquid and commonly pay attractive levels of dividends. Along with investing in a property index, REITs are arguably the simplest way to gain exposure to property.
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Property Exchange Traded Funds (ETFs).
Property ETFs typically offer an exposure to either a real estate index or a basket of real estate company shares. Again, they are highly liquid and give a high degree of diversification although the level of income distributed is generally lower in comparison with REITs.
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*Syndicated Investment Property.
Syndicated investments involve amalgamating a number of investors to purchase one or more property assets which might be out of reach for individual investors acting alone. Very often these structures involve gearing and they usually have defined life spans. They also offer low or no liquidity in advance of final liquidation. Because of their predefined terms and their use of gearing, market timing is a more critical factor for these structures than for the alternatives. Investing into a downturn can bring huge levels of risk which may result in investor equity being fully wiped out as occurred post the 2008 financial crisis. On the other hand if the market timing is right these structures can deliver highly attractive returns.
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*Syndicated Development Property.
As with the previous category, these structures assemble a number of investors together. In this case, however, the purpose is to provide equity finance for development purposes. As such they do carry an extra level of risk. Normally these investments involve a partnership with a developer and can have an expected life span of c.2 years. With the shortage of bank finance available to developers, combined with the undersupply of housing in urban locations, these structures have become popular in recent years. Again market timing is important, but in favourable circumstances, the returns from these investments can be relatively high. We normally rank development property as very high risk i.e. a risk rating of 9 in a scale of 1 to 10 with 1 being the lowest risk and 10 being the highest.
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*Direct Property.
Purchasing a property asset directly is of course the most obvious way to gain exposure to property but this route does have a number of drawbacks. Firstly, a single property can represent a significant proportion of your retirement arrangement / personal portfolio resulting in a highly skewed asset allocation unless your retirement arrangement / personal portfolio is relatively large. Secondly, direct ownership of property brings with it management costs and headaches which can largely be avoided by using the other routes.
Comparing Direct Property to Property Fund in Pension
Investing Pension in Property
Buying a Property through your Pension – General property investment rules
