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Property

Throughout the early part of the ‘noughties’, the property sector boomed. However, the balance between loans secured on property, together with the cost of servicing the loans created a bubble that became unsustainable.

Property, like many other asset classes, became a victim to an overexposed market.

IMA (Investment Managers Association) figures indicate that property was the largest individual sector for positive inflows during 2006 to 2007. The increasing focus on portfolio building together with the relative performance and volatility of the equity markets encouraged this trend.

There is always an element of investing in the latest growth area and it seems likely that property investing benefited from this trend at the time. Investors also viewed property ownership as ‘relatively safe’ due mainly to the fact that it was an established market with a high dependency.

Property purchase for investment purposes can continue to play a part within a portfolio. However, with the changing landscape for credit, borrowing against property has become stricter and therefore, buying into this asset class has become more expensive and needs to be considered carefully.

The retail investor has three main property investment options:

  • Residential property
  • Commercial property
  • Property shares
  • Until recently these have been UK focused, however, more global property options are now becoming available.

Residential Property

In terms of residential property, most individual investors are already top heavy in this area given property price rises and the growth of the buy to let market in recent years.

Collective Investing in Commercial Property

Collective investing simply means that you purchase assets with a number of other investors, which means the assets are more widespread and the cash flow is greater for the investment manager to speculate and seek opportunities.

The range of collectives now available goes some way to addressing this, although property supply is still not plentiful and this highlights the importance of correct asset allocation. Many fund managers are currently cautious about the supply and demand of property worthy of investment.

Given the influx of investment over the last few years there is some caution over the availability of good commercial properties for these funds to buy into. The liquidity of these funds can be quite volatile, which means that if the property market becomes tight, such as it has during 2008 / 2009, fund managers will restrict withdrawals to protect the investors.

From an investors perspective there is still a relatively small number of property funds, compared with other areas of the investment market. The reasons relate to the supply of property and the skills of people to manage them. It is not easy to start a retail property fund given the barriers to entry, and building a realistic portfolio without overloading in the riskier property areas is not straightforward.

Property Shares

Property shares were the other alternative on our investment list and the biggest advantage they have over 'bricks and mortar' investing is the liquidity they offer. The recent introduction of REITs (Real Estate Investment Trusts) has seen a number of companies including British Land move to this new format and this may in the future offer more alternatives to the retail investor, although now they should remain under surveillance for the average investor. All the immediate gains to be made by investors have been absorbed and the average investor will not be able to benefit from this change.

The biggest disadvantage of property shares is that they are shares and will therefore react more in line with the general equity market, unlike direct property investment. Again, it is important for the investor to look at what is being invested in, as there are very few collective investment schemes that are invested mainly in property shares although the Aberdeen Property Share Fund has been very successful at this. Other funds often use property shares to provide liquidity in their funds and New Star is an example of this.

Considerations

The property market is in general reliant on the health of the overall economy and current interest rates, but is not as correlated to the economy as closely as equity prices. Commercial property is the least correlated asset class to equities and bonds. In particular, as rental agreements have increased in length over recent times the 'security of income factor' has increased. This puts the asset class in a strong position to offer a great diversification play in a portfolio and may provide a more secure income stream over the long-term.

The commercial property market can struggle when interest rates rise and economy is weak. The weighting given to this asset class depends your risk profile. It is likely that an income portfolio might have a greater bias to property to provide some security and a potentially reliable income stream.