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Property sector

Property sector

Property is a deceptively diverse asset class but can broadly be split into two: residential and commercial.

Richard Troue - Head of Investment Analysis
25 June 2018

Property is a diverse asset class, but can broadly be split into two: residential and commercial. There are few funds which invest in residential property. Those who invest in this area tend to do so through their home; a buy-to-let investment; or individual property shares.

Within the IA (Investment Association) Property Sector, funds invest in either physical property (bricks and mortar) or the shares of property companies. From 1 September 2018 the sector will be split in two. A new IA UK Direct Property Sector will contain funds that invest in bricks & mortar. A second sector (IA Property Other) will list funds that invest elsewhere, including those that invest overseas or in the shares of property companies. This should make it easier for you to distinguish between different funds.

  1. Physical property
    • Residental
      • Buy-to-let
    • Commercial
      • Property fund
        • Retail
        • Industrial
        • Office
  2. Alternative property exposure
    • Residental
      • Individual property shares
    • Commercial
      • Property Fund
      • Investment Trust/REIT

Our view on the Property sector

The fortunes of commercial property funds are heavily tied to the health of the economy. When economic growth is strong, demand rises. This pushes up rents and property prices, and encourages more construction. During a slowdown the opposite occurs.

Most of the returns from property investments come from the rents paid by tenants in the buildings you own. Commercial property therefore often appeals to income-seeking investors. Please remember the value of any investment, and the income from it, will fall as well as rise.

Unit trusts investing in physical property

Property funds are popular with investors, but we don’t think they're the best way to invest in this area.

This is because commercial property is not easily bought and sold. It’s time consuming, labour intensive, and expensive.

This creates problems for fund managers. Investors usually want to put a lot of money into their funds when performance is good and the outlook is rosy. But because it can take months to find and buy suitable properties, the manager often ends up holding a lot of cash and missing out on rising property prices.

Similarly, when the outlook isn’t so good, or when performance has been poor, investors tend to sell property funds. This often forces the manager to sell properties in order to give investors their money back. The best properties are often quickest and easiest to sell, so remaining investors can be left with less attractive investments.

To help with this issue fund managers adjust the pricing of their funds and/or stop investors selling them. These decisions are not taken lightly and only in extreme circumstances. It does mean you could receive less than you expect when selling a property fund, or not be able to sell at all for a period of time.

This can be detrimental to the fund’s performance and means returns are not solely down to the skill of the fund manager. The high costs associated with buying and selling property also eat into the income received by investors, more so than when buying and selling shares.

Unit trusts investing in the shares of property companies

These funds work in much the same way as any fund that invests in company shares. The value of the fund is directly linked to the value of the shares the manager invests in.

A large proportion of these funds tends to be invested in Real Estate Investment Trusts (REITs). REITs own and operate a variety of properties and are looked after by an expert management team. This helps to spread risk and avoid overreliance on a small number of properties.

It’s also possible to invest in REITs, and other property-related investment trusts, directly. These don’t have the same problems as unit trusts when large investors try to buy and sell at the same time, but it's possible for the shares in the REIT or investment trust to trade below (or above) the value of the properties they invest in. This is known as trading at a discount (or premium).

Investment trusts can also borrow money to invest. This can improve returns when markets are rising, but amplifies losses in falling markets, so it’s higher risk.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Office: includes business parks and office building

There has been a divergence in the performance of Central London offices and those in the rest of the country. In the capital rents have fallen. Companies are reluctant to sign leases because they don’t know the outcome of Brexit negotiations. Some might expand into Europe or relocate there.

On a more positive note, global technology firms are opening more offices in London. Facebook, Apple and Google have all committed to new offices and technology companies now employ more people in London than financial and insurance companies. More demand, and the fact fewer offices are being built, could cause rents to rise over the longer term.

Outside London rents have increased. Regeneration schemes, better transport, more affordable housing, and a better quality of life means some regional cities are seen as desirable alternatives to the capital to live and work. This has increased demand for offices.

Retail: includes shops, shopping centres and retail parks

Retailers have been investing in online services over the past few years, rather than opening lots of new shops. This is expected to continue as fewer people hit the high street. Some companies have also been forced to close stores or shut down altogether. A lack of demand and more properties sat empty has caused rents to fall.

It’s not all doom and gloom though. The best retailers combine shops in desirable locations with an excellent online service. Similarly, people still want to visit shopping centres and retail parks that combine shopping, dining and entertainment. It’s therefore in prime locations that remain popular with shoppers that the best investments are likely to be found.

Industrial: includes factories, distribution warehouses and industrial estates

Industrial property has been in high demand and rents have risen strongly recently. Amazon accounts for a lot of this. The company needs a lot of warehouses close to big cities to be able to offer its Prime next-day delivery service.

There’s also relatively few new warehouses being built. This helps to keep rents higher.

Longer-term opportunities in this sector are likely to come from refurbishing existing industrial sites. Lots of companies these days need modern, efficient factories that enable them to automate as much of their business as possible.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Property fund reviews

We regularly review the major investment sectors. Here we provide comments on a selection of funds in the Property sector. They're provided for your interest but not a guide to how you should invest. If you're unsure if an investment is right for your circumstances please seek personal advice. Comments are correct as at end May 2018. Remember all investments can fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future.

There is a tiered charge to hold funds with HL. It is a maximum of 0.45% p.a. - view our charges.

Source for performance figures: Financial Express

This fund buys commercial properties nationwide, but most of the investments are in London and the South. Investments are well-spread between retail, office and industrial properties.

The managers are happy with the properties they’ve invested in and they don’t plan to make many changes to the fund in the short term. They'll make improvements to some properties though. They’ll refurbish some, while modernising others and making them more efficient. This should make them more appealing to tenants and reduce the potential for vacancies. It also makes it more likely that businesses will sign longer leases, and increases the value of the property.

This fund isn’t as London-centric as some competitors. It owns properties in the Midlands, the North, and Scotland as well as in the capital.

The fund’s investments are well-spread across the UK, and it owns almost 100 properties. Almost a third is invested in industrial properties, with a further third in offices, and relatively little invested in Britain’s high streets.

The managers work closely with their tenants and building managers. They believe this helps keep buildings fully occupied, and will improve the long-term performance of the fund.

Performance has been good in recent years. The fund has achieved a higher return than competitors in the IA Property sector over the past five years. Please remember past performance is not a guide to the future.

This fund invests in the shares of property companies, and companies that make most of their money from property.

The majority of the fund is invested in UK property companies. Brexit is seen as a risk to firms based in the UK, and their performance has been volatile over the past three years. The fund has performed better than its benchmark, the FTSE 350 Real Estate Index over this time though.

Part of the fund is invested overseas, in countries including Germany, France, and Sweden. This means it’s not reliant exclusively on UK-based companies. The managers recently bought shares in Safestore, for example. It’s a French storage company with facilities near Paris, where there’s a lack of storage.

The managers don’t invest in many companies, so each one can contribute significantly to performance, but it’s higher risk.

This fund owns just over 100 properties across the UK, but it has a bias to the South East.

The bulk of the fund is invested in retail properties, including shopping centres and retail warehouses. The managers admit that in the near term the uncertainty of Brexit might hold back performance. In the long-run they think demand for high-quality properties will remain strong. In the meantime they have invested more in properties where they expect tenants to be able to survive and pay rent even in a tougher economic environment.

The fund has delivered a return slightly lower than the average fund in the IA Property sector over the past five years. Please remember past performance is not a guide to the future.

This fund invests in the shares of property companies worldwide and aims to track the performance of the FTSE EPRA / NAREIT Developed Index.

Over half the fund is invested in the US, with the rest spread out over Europe and Developed Asia. Just 5% is invested in the shares of UK property companies. It’s a good choice if you already have a lot of investments in UK property companies, or to invest in property globally without being dependent on the UK.

The fund launched in November 2010 and since then it’s done a good job of tracking its benchmark although this shouldn’t be seen as a guide to the future.

Unlike a lot of its competitors this fund has very little invested in the London property market. It’s biased to Southern England, but also has investments in the Midlands and the North.

On 1 May 2018 Gerry Frewin took over as lead fund manager from Don Jordison. Gerry Frewin has worked with Don Jordison for seven years and co-managed the fund since 2015. He doesn't plan to make any significant changes to the way the fund is managed. We don't think existing investors need to take any action providing the fund still meets their objectives.

Performance has been mixed over the long term. The fund has delivered a higher return than the average fund in its sector over the past five years, but it’s delivered a lower return over the past ten. Please remember past performance is not a guide to the future.

Latest research updates

Threadneedle UK Property - management change

Threadneedle UK Property - management change

Sat 10 February 2018

Don Jordison will step down as co-manager of the Threadneedle UK Property Trust on 1 May 2018. Find out more about this change in our latest update.

Investment notes

Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.

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