The investment case for property

By Stephen Findlay

UK economic growth may have stalled and London's property slump may be spreading but, argues Stephen Findlay, there are good reasons why real estate remains an attractive proposition for investors and their advisers

Despite the growth of the UK economy stalling in 2018 and the London (residential) property slump starting to reverberate outside of the capital, real estate remains an attractive proposition for investors and their advisers due to historical long-term growth - a return of 10.9% a year since the 1970s - and people seeing it as underpinned by ‘real bricks & mortar'.

Changes to buy-to-let tax relief, coupled with rising house prices and the introduction of a stamp duty surcharge on second homes, mean buying a property to rent out is no longer a viable option for many. And, against this backdrop, investors are increasingly looking for alternative strategies to invest in property, away from, or as well as, the traditional buy-to-let route.

Improved product innovation means it is now possible for private and passive investors to access uncorrelated instruments that were once the preserve of institutional investors. Increased choice, however, means advisers are under pressure to keep up with the latest market developments.

To bring you up to speed with the many options available, here is a brief overview.

Listed funds

These remain popular to gain exposure to property and range from commercial, residential and indirect property funds.

Pros: Listed funds generally offer clear pricing and you can typically liquidate your investment to cash - although there may be costs or fees involved, as well as timing considerations.
Cons: Capital is at risk and investors do not have control over the underlying assets held. Listed funds can follow the broader market movements regardless of the underlying asset values, and tend to be weighted toward commercial property.

Unlisted funds

These provide more options for investors looking for alternative ways to invest in property.

Pros: Since unlisted funds are not traded on an exchange, their price is not subject to daily price volatility, and they trade at a value closely linked to their net asset value (NAV).

Cons: Investments in unlisted funds are generally illiquid, have high subscription minimums, and many have ‘lock-in' periods. Recent innovation has, however, seen unlisted funds offer weekly trade points - an improvement from the traditional quarterly or semi-annual liquidity cycle.

Crowd-funded real estate SPVs

Pros: These allow investors to select individual properties to invest in and offer more control and transparency, with pricing typically linked to NAV.

Cons: The pipeline of investments is not guaranteed or necessarily suitable for the investor's objectives, so it takes time to create a portfolio. These Special Purpose Vehicles (SPVs) are not readily saleable securities. Where liquidation is possible, the proceeds can be lower than market value, and trading fees can be significant.

Property-backed lending

This provides an opportunity to earn a passive income from property, with the potential for attractive risk-adjusted returns.

Pros: Intended to sit between cash savings and stockmarket investments in terms of targeted risk/return profile. Property loan investments range from buy-to-let through to wide-ranging property development - such as building hundreds of homes on a greenfield site. 

Cons: Investors should ensure they understand the nature and scope of the underlying project. Does it need planning permission? What is the loan-to-value ratio? Is the project valuation independently verified? As with any investment, due diligence is paramount.

The types of properties within any of these investment structures should be an important consideration - for instance, offices and warehouses could generate good returns in 2019. High street properties, however, are under pressure, so you may well want to avoid these.

Similarly, with residential, you may want to know the exposure to the top end of the market and in central London, as some areas have decreased in value and, as suggested earlier, this may reverberate into other regions in 2019.

Holistic view

Despite a recent spike in property fund outflows, property remains one of a relatively few consistent positive performers for investors over recent years. Investors who take a holistic view, with longer-term investment goals in mind, are less likely to be spooked into selling their holdings because of a bout of short-term market volatility or uncertainty.

Some allocation to property remains a sensible investment choice within a well-diversified investment portfolio, offering attractive yields relative to cash and fixed income. Depending on the investment structure, property can offer useful diversification and, with its negative correlation to other investment assets, it helps mitigate the effects of volatility of other asset classes.

Crucially, long-term investors who view property beyond its illiquid nature will recognise that, regardless of any immediate negativity following Brexit (or lack thereof), property assets are an excellent investment in general.

Anyone who has invested in property, in whatever form, is likely to have seen healthy returns, a fact that should not be pushed aside by recent instability. As with most investment decisions, investors should be encouraged to remain focused on their long-term goals when investing in property or any other asset class.

Stephen Findlay is the CEO and founder of BondMason, a 5-star Defaqto rated investment specialist in property-backed lending

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Capital is at risk. Nothing in this article shall be construed as advice. Please contact your Financial Adviser to determine if Direct Lending is a suitable allocation for your investment portfolio. Please see BondMason’s full disclaimer and terms for details.