Investing in "bricks and mortar" has been hugely popular in the UK for years
For some unit trusts the financial crisis of 2008 caused significant problems. Those holding primarily physical property rather than shares were sometimes unable to sell enough assets to meet redemptions by investors, who in some cases were prevented from selling for a number of months.
Transactions in any kind of physical property are lengthy and labour intensive, which is why it doesn't really lend itself to ‘open ended' funds that are bought and sold daily. REITs (Real Estate Investment Trusts) are, in my view, better vehicles for physical property investment as they have a fixed number of shares and can always be bought and sold via the stock market. However, their prices are often volatile and can end up being dependent on one region or property type doing well.
Another option is to consider investing in unit trust or OEIC funds which themselves invest in property shares and REITs. In the short term these are also sensitive to the wider equity markets, as you would expect. Yet as Gillian Tiltman, manager of the M&G Global Real Estate Securities Fund, points out the longer the period you look at, the more they correlate with physical property prices and not with equities.
The benefits of property investment are clear. It can represent a classic ‘buy and hold' investment producing regular income for the owner, which can potentially rise over time offering a good inflation hedge. It is also possible to make money buying and redeveloping cheap property, or even building an asset from scratch. In Ms Tiltman's portfolio there are companies engaging in all these activities. Shaftesbury, which specialises in West End London property, tends to develop sites and hold assets for the very long term. Meanwhile, CapitaMall Trust in Singapore, a retail REIT focused on shopping malls, is aiming to improve the quality of its assets in order to increase rents.
As any landlord will also know, it is essential to keep costs firmly under control in order to maximise returns. Ms Tiltman focuses on finding companies serious about doing this so they are as lean as possible. The structure of the company's balance sheet is also crucial. Taking on too much debt can have disastrous consequences if things go wrong, and when they do it can happen very suddenly. She therefore takes a conservative view and avoids companies with excessive leverage. Finally, she will only own stocks where corporate governance is strong and she can be confident of the rule of law in the country where it is based.
We are not particularly keen on UK property as an asset class, though a global fund has some merits. Owning a slice of exciting real estate markets such as New York, London and Hong Kong is an interesting proposition as global property cycles are not necessarily synchronised as they are for equities and bonds. There are often distinct local markets with their own dynamics. However, given the relatively specialist nature of the fund and the manager's relatively short tenure, we are not currently considering it for our Foundation FundList of favourite funds across the major sectors.
