The best way to invest in property
The perennial debate among investors focused on adding property exposure to their clients portfolio is the choice of open or closed ended funds if investing in bricks and mortar property.
Open-ended funds can fall foul of a liquidity mis-match, whereby the end client can withdraw their money at one day’s notice, but the underlying investment is in an asset that cannot quickly be sold.
This creates the potential for funds to be unable to pay out clients in the event of an economic downturn. Fundhouse M&G suspended its property fund at the end of 2019 as investors withdrew £1bn.
And the Covid 19 crisis meant that the 11 open-ended property funds with daily dealing in the UK market have had to shut, with investors unable to get their cash out.
This has happened because surveyors have not been able to work during lockdown, so have not been able to value properties. This means open-ended property funds cannot publish a daily net asset value (NAV) and so investors cannot know the value of the assets they own.
With an investment trust, the shares are traded daily on stock exchanges and so an investor can always see the price, and always sell at that price.
But because the shares are traded on a stock exchange, they are vulnerable to the possibility of falling in value when the wider stock market sells off, and so those assets are relatively more correlated with equities.
Paul Derrien, investment director at Canaccord Genuity Wealth Management says the type of property fund suitable for an individual client relies on their time horizon.
He says: “This really does depend on what type of property exposure investors are seeking and they come with their own risks.
“Once again a number of open-ended property funds became gated due to the pandemic, therefore investors cannot get their funds out so any investment into this asset class needs to be long term with the assumption that it is as illiquid as an actual property that you might buy.
“It is often better to go for property funds with quarterly redemption dates as these deter short-term trading and reduce the risk (but not eliminate it) of gating.
“The other option, if you are more short term is listed REITs (Real Estate Investment Trusts). These can provide excellent opportunities to access property at a discount to its theoretical value and often provides the greatest opportunities after an economic decline, as you get not only the increase in the property values, you can also receive a boost from the share price rising.”
Investment trusts can also use gearing, that is debt, to get even more exposure to the asset than they have with the cash they invested.
Correlation to equity markets
Open-ended property funds are also less correlated to wider equity markets as a result of those products keeping a significant slug of their capital in cash as a buffer. This means such funds are typically less invested in property as an asset class than are investment trusts.
Source: FT Adviser