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Alternative investments: Spotlight on property

Jonathon Curtis, Investment Analyst, looks at the pros and cons of investing in property and examines the role it can play in a portfolio.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

In the second of this four-part series we’ll lift the lid on investing in property. Please note that this article is not personal advice and if you’re unsure that an investment is right for you, seek advice. All investments fall as well as rise in value, so you could get back less than you invest. Yields are variable, not guaranteed, nor a reliable indicator of future income.

Read part one: commodities

Much more than buy-to-let

Property is a giant asset class. So much so that it’s sometimes called the fourth asset class, after shares, bonds and cash. Many people’s first thought about investing in property is buy-to-let. Inspired by decades of house price growth and TV programmes such as Homes Under The Hammer, there are around 2.5 million buy-to-let investors in the UK. But commercial property also forms a large part of the investment property sector, and performance is driven by far more factors than the residential market.

Commercial property is usually divided into three parts: industrial, office and retail. Industrial properties include warehouses, factories and distribution centres. Offices are normally either city centre blocks or out-of-town office parks. Retail includes high-street shops and shopping malls. There is also an alternative property sector, which includes hospitals and doctors surgeries, retirement communities, student accommodation and leisure centres.

Aside from bricks and mortar, there are also opportunities to invest in land with development potential, and even farms and forests, which could provide investors with some potentially useful tax benefits. Property is a diverse as well as enormous sector. Remember that tax rules change and benefits depend on individual circumstances.

Should I invest in property?

Investing in property is popular. The basic concept is easy to understand and many investors are reassured by the physical nature of bricks and mortar. Property often performs differently to the stock market so could provide some useful diversification to a portfolio for those who are happy to accept the risks. It also gives investors the potential for capital growth and healthy yields from the rent tenants pay.

There are of course downsides too. Unlike buying and selling shares and bonds, physical property transactions can be lengthy, expensive and downright stressful. And once a property has been let there are often lots of costs associated with maintenance and repair, taxes, insurance, agent fees, not to mention the potential for bad tenants and times when the property is empty.

UK property investment sectors vs the UK stock market over 10 years

Past performance isn’t a guide to the future. Source: Lipper IM to 31/12/2019.

How to invest

There are some convenient ways to invest in property that don’t involve buying any bricks and mortar yourself. One option is funds that invest in physical property. There are generally two types: open-ended and closed-ended.

Open-ended ones operate like a normal fund and fall under the IA UK Direct Property sector. We don’t think they’re the best way to invest though as liquidity can be a big issue. If lots of investors become nervous and ask for their money back, a property fund manager may not be able to sell properties quickly enough to raise the cash. In extreme cases they could temporarily ‘gate’ the fund, stopping investors getting their money, giving the manager more time to sell. This happened to some funds in December 2019, so it’s a real risk to consider.

We prefer closed-ended funds. The best-known are real estate investment trusts (REITs). They operate like shares. The price goes up and down as investors buy and sell, but the money managers have to invest remains the same. That means they can focus on managing the portfolio without worrying about how much investor money is coming in or going out.

You could also invest in shares of property sector companies. Examples include housebuilders, estate agents, home improvement suppliers and storage companies. There are also funds available that invest in these companies, which form the IA Property Other sector. Property sector companies listed on the stock market might not offer the same level of diversification compared with investing in physical property though.

Read our latest Property sector review

Search for Real Estate Investment Trusts (REITs)

Search for property funds

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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