How to invest in property without buying a house
We explain how you can invest in property, without purchasing physical bricks and mortar.
What you’ll learn:Click to toggle accordion What you’ll learn:
What the pros and cons of property investment are.
How to invest in property.
How new regulations affect property investments.
Property is one of the major asset classes, along with cash, shares and bonds. Even if you don’t want to buy a property yourself, there are plenty of ways to potentially profit from bricks and mortar without buying a house.
Remember, however, that all investments carry risk, so if you’re considering investing in property, you must be prepared to accept that you could get back less than you put in.
Why invest in property?
Holding property within an investment portfolio can help provide diversification, as it tends to perform differently to other assets in response to different market conditions.
That means if, for example, equities are performing badly, property may perform better. The hope is that by investing in a broad spread of assets, if one area underperforms, the performance of others may compensate for this.
The other main attraction is that property can potentially provide a good source of income thanks to rent from tenants, as well as the opportunity for capital growth if property prices rise.
Many property funds invest in commercial property, such as retail parks and office blocks. Typically, yields are higher than those available from the residential market, with businesses prepared to pay more for the right location.
Yet a handful of funds offer exposure to the UK residential market through flats and houses within the rental sector, where yields and valuations remain attractive to investors. However, these are less common than funds that are focused on commercial property.
It’s also possible to invest in indirect property funds that instead focus on the shares of firms within the property and property development sector, rather than physical bricks and mortar. In this case, their performance is linked more closely to the wider equity market and the trading performance of the firms in question. These funds are typically not as popular as direct property funds.
If you want to search and buy property funds via Smart Investor, you first need to open an account so you can browse the full range of investments available.
Understanding the risks
If you’re considering investing in a property fund, it’s important to understand the risks involved. Property is known as an ‘illiquid’ asset because generally it can be difficult to sell quickly, at its market value.
If a large number of investors attempt to cash in at the same time, this could force some property funds to suspend trading, unless they have a significant cash buffer in place. For example, several funds were forced to temporarily suspend redemptions in 2016 after the UK’s vote to leave the EU led to a wave of redemption requests which exceeded the cash available in the fund. When this happens, it means that investors cannot sell their holdings until the suspension is lifted and the value in the meantime continues to change, possibly falling.1
Before investing in property funds, it’s important to check the holdings of any investments you might already have too. For example, if you already have a multi-asset fund, which invests in a range of different assets, this may hold investments in property, so you may decide you don’t need to add a specialist property fund to ensure your portfolio is properly balanced.
The best way to find out exactly what your existing funds invest in is to read the Key Investor Information Document (KIID), which explains the fund's key features, such as its investment objectives, where it invests and the costs involved. You can also review the largest holdings of the fund by looking on the product page in our Fund search, and also the fund manager’s Factsheet that you should find there along with the KIID.
Remember your investment in any sector could go down as well as up, and you might not get back the original sum invested.
Types of property funds
Property funds can be structured in different ways.
Many property funds are unit trusts or open-ended investment companies (OEICs). Known as ‘collective investments’, these pool your money with that of other investors in a range of shares and investments. You are able to buy shares in OEICs, which are incorporated as a company, or units in a unit trust, which are established as a trust.
The price you pay will depend on how the fund is performing at that particular time, with the value of units or shares rising or falling depending directly on the value of the underlying assets held by the fund. In the case of investors wanting to leave and sell their holding, the fund manager will buy back units or shares.
Most property funds hold a proportion of the fund as cash so that investors can take out their money when they want to. However, if lots of investors decide they want to cash in at the same time then, as previously mentioned, this can cause real problems if there isn’t a big enough cash buffer in place and the fund needs to sell property assets to get investors their money. Many property funds have significantly increased the amount of cash they hold in an attempt to prevent a recurrence of this problem, but this can potentially damage the ability of this type of fund to generate both capital returns and income, as a larger proportion of the fund is not invested as it remains as cash. Despite the increased allocation of cash, if there was a repeat of the mass redemptions seen in 2016, managers may still decide to suspend client redemptions, with investors left unable to sell their holdings until the suspension is lifted.
Closed-ended funds such as investment trusts and Real Estate Investment Trusts (REITS) may also invest in the property sector. These funds are listed on the stock market, and trade like stocks and shares throughout the day. Once their particular shares are listed, investors can buy them on the market. Unlike investment trusts, a REIT can only own or finance income-generating real estate assets.
Market demand dictates an investment trust or REIT’s share price, which can move either above or below the value of the assets that it holds, called the Net Asset Value (NAV). When the price moves above the value of the fund, it's trading at a premium. When the price falls below the NAV, it's trading at a discount.
Stock market ups and downs may affect the performance of the underlying property assets, and of course, investors may see their investments rise or fall in value.
Investment trusts don’t have the same type of liquidity issues that are associated with open-ended funds. When investors sell shares in an investment trust, the manager does not need to sell physical assets, as the investor is simply selling the shares on the market to another investor. For shares to sell, you need someone who wants to buy your shares from you. However, bear in mind that property funds such as investment trusts that are listed on the stock market can see their values fall or rise depending, amongst other things, on the performance of the underlying property assets, which will influence demand.
There are also geopolitical risks that could impact on property sector yields and values. For example, the economic uncertainty following the UK’s vote to leave the EU, and while Brexit negotiations continue. Also, any interest rate rises may place pressure on businesses’ finances within the commercial property sector.
How new regulations affect property investments
Most open-ended funds are subject to the Undertaking for the Collective Investment of Transferable Securities (UCITS) regulations, which generally cover retail funds with underlying assets that are relatively easy to price and sell. UCITs’ rules include that the fund must invest in assets that can be easily priced, sold, and must not concentrate investments in too small a number of assets.
However, open-ended funds that invest in illiquid assets such as property, are likely to be run as non-UCITs retail schemes (NURS), which follow different rules.
You should make sure you understand the features of a NURS, investment trust, or REIT and what they mean for your investment; new regulations mean you will now be asked to complete a quick Appropriateness Assessment before placing a purchase in any of these products.
The value of your investments can fall as well as rise, and you might get back less than you initially invested. If you’re unsure where to invest, consider seeking professional financial advice.
Remember, the value of investments can fall as well as rise and you could get back less than you invest. Seek independent advice if you’re unsure of this investment’s suitability for you.
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