As a way both to diversify savings and to take advantage of bricks and mortar, property funds have enormous appeal. This is a way to share in the growth of a sector way beyond your own home – geographically and by type of property.
Some funds invest in actual properties whilst others are an arm’s length away by buying shares in developers. Funds also enable the investor to benefit from the market in commercial property.
Average house prices in 2011 fell by just 0.23 per cent to £221,331, according to property portal Zoopla, whilst Halifax say the market went down 1.3 per cent. Yet Martin Ellis, Halifax’s housing economist, says that “house prices held up well last year in the face of the difficult and deteriorating economic climate and substantial pressure on household finances.”
Rightmove, the online property portal, predicts national asking prices will rise two per cent this year but a five per cent fall is expected by both estate agent Knight Frank and forecasters Capital Economics. However, they all see London outperforming, perhaps buoyed up by the Olympics, which should ensure certain funds continue to shine.
Taking a three-year view, the top performing mutual or open-ended funds according to research specially prepared by Lipper for the Yorkshire Post, are:
n First State Global Property Securities A, up 62.1 per cent;
n M&G Global Real Estate Securities A, up 59.2 per cent;
n Standard Life Global REIT A, up 49.2 per cent;
n Aviva Investors Global Property Sc Acc, up 47.8 per cent;
n Fidelity Global Property Acc, 44.1 per cent.
Yet, over the same period, investment trust property funds showed far greater gains. They have several advantages over mutual funds as they can borrow to seize a good opportunity, hold money in reserve to pay future dividends and have boards of independent directors.
Lipper research shows the top performers in this sector to be:
n Matrix European Real Estate, up 839.4 per cent;
n Invista European Real Estate, up 268.9 per cent;
n Picton Property Income, up 263.9 per cent;
n Invista Foundation Property, up 235.1 per cent;
n Investors in Global Real Estate, up 174.9 per cent.
The first two investment trusts are focused on continental Europe, the next two on the UK and the fifth globally. Independent financial advisers AWD Chase de Vere only recommend property funds which invest in actual buildings in the commercial sector. Andi Murphy at their Leeds office says this is because such funds have “far less correlation to the stock market than investing in property shares”.
Commercial property can provide consistent longer term returns. Coupled with its diversifying nature, such funds can offer some protection from stock market falls.
Aviva Investors Property Trust, Henderson UK Property, L&G UK Property and M&G Property Portfolio are four funds tipped by AWD Chase de Vere, which recommend clients hold five to 10 per cent of their portfolio in this sector.
One idea is to seek a fund which specialises in a field that will always be in demand, such as the NHS. Primary Health Properties is just such a body, investing in health properties.
The market in commercial property performed strongly in the first half of 2011 but much of the gain was lost in the last six months as fears over the health of the eurozone and European banking sector put pressure on the sector.
Martin Payne, Leeds director at stockbrokers Brewin Dolphin, says “the fundamentals remain encoura-ging”. Demand for property in London remains relatively strong owing to its status as a global financial centre whilst building costs have dipped reducing the break-even costs of new developments.
Payne expects activity to increase in the medium term with lease expiries set to rise over the next two years. He prefers closed-ended funds like investment trusts as they offer “a level of liquidity in the shares which prevents mandatory closure in periods of market stress”. This contrasts with many open-ended funds which prevented holders realising their investments during the credit crisis. Some have even to reinstate daily dealing.
Investment trusts generally have a lower charging structure and can be bought at discounts to underlying net asset value. Brewin Dolphin tips British Land, which is a £4.2bn firm, focusing on prime assets such as City of London developments and out-of-town retail. It has a high degree of income protection from the longest average lease length in the sector and has one of the highest yields with an annual 5.4 per cent.
ISIS Property, launched in 2003, is also recommended by Payne. It has a diversified portfolio of UK office, retail and industrial commercial property and trades on a six per cent discount, yielding 8.7 per cent. Its annual management fee is only 0.6 per cent.
Various brokers, including Payne, like TR Property which invests in both direct commercial bricks and mortar (10 per cent of its assets) and property shares with a significant non-UK element. Among its peers, it came second over 10 years but has not shown such star performance in recent years.
A number of the largest commercial firms, like British Land, changed their status into REITs (Real Estate Investment Trusts), following a 2007 change in legislation which was designed to make it more tax-efficient for savers to hold property.
To maximise an investment, place property holdings in an ISA or SIPP. L&G’s Property Unit, for instance, launched six years ago and with over £606m, is available as an ISA but not into a pension. It is 72 per cent invested in actual properties such as supermarkets.
A novel way into the sector is through one of the friendly society with-profit funds where property is the main investment. Druids Sheffield at Wath upon Dearne near Rotherham have 70 per cent residential property, Kingston Unity in Wakefield have almost 48 per cent in commercial estate and Sheffield Mutual in Tankersley near Barnsley have 50 per cent in commercial.
Their tax-exempt savings plans, which run for at least a decade, accept £270 annually or £25 monthly with even babies eligible. The results are excellent with policies maturing at the end of 2010 returning annual rates of 11.05 per cent, 5.69 per cent and 12.72 per cent respectively.