This week we’re going to look at property funds as part of our series of articles exploring the ingredients that make up a successful investment portfolio.
When people think about investing in property they usually think it means becoming a buy-to-let landlord.
But there are alternative ways of accessing the market which enable you to diversify your portfolio without the pitfalls and headaches of actually owning the bricks and mortar yourself.
The first of which is what’s known as a property fund. This typically invests in commercial rather than residential property.
This automatically has the effect of diversification that you can’t get through a buy-to-let property where all your eggs have gone into one basket.
Now, the buy-to-let investor might argue that they can spread their risk by simply buying another property, but I’d argue that they’ve perhaps actually doubled their risk!
So, the advantage of a property fund is that we can diversify by holding a mixture of shops, factories, warehouses, retail parks, ground rent funds and so on.
We remove some of the risks associated with owning a buy-to-let property directly, for example a tenant defaulting, a tenant damaging the property or a tenant refusing to leave.
We can also start to deal with some of the tax issues because you don’t have to pay Stamp Duty to get into a fund, you don’t have to pay huge amounts of income tax on the rent, particularly if that fund sits within an ISA, and you don’t have to pay Capital Gains Tax (CGT) when you sell the investment, again if it sits within an ISA or if it’s within your CGT exemption or it sits within a pension fund.
You’ve really got two choices when it comes to choosing property fund. Firstly, you could buy what we call a bricks and mortar fund where the fund manager physically owns property.
One of the potential downsides of this is that the fund is potentially illiquid. If a situation arises where the fund manager is met with a large number of redemption requests at the same time they have to sell a building to meet those demands. If this happens he or she could apply a notice period, or worse, apply a penalty for somebody that needs their money out within that period.
However, another way of adding property to your portfolio is through a Real Estate Investment Trust (REIT).
The advantage of a REIT is that you’re owning shares in companies whose trading activities are property related.
You buy shares in the investment company like you would any other, they are daily priced and you can jump in and out of the fund any time you like, so you don’t have to worry about liquidity or penalties.
One of the downsides of a REIT is that it’s typically more volatile than a bricks and mortar fund because it is shares as opposed to buildings. But again, shares are a specific value, whereas a building’s value is a surveyor’s opinion and it may not be right.
There are advantages and disadvantages of each so it’s important to take advice so that we can ascertain what the purpose of the investment is before deciding which approach is best for you. Is your driver low volatility? Is it capital growth? Is it income?
Just like the bond funds that we talked about last week, it’s crucial to understand what sits underneath the bonnet.
Next week I’ll be answering the question ‘What is a gilt?’ and explaining how they can be used alongside bonds to create the ideal investment portfolio.
TIM EMBLETON
INVESTMENTS – THE VALUE OF UNITS CAN FALL AS WELL AS RISE, AND YOU MAY NOT GET BACK ALL YOUR ORIGINAL INVESTMENT
Taxation and some forms of Buy to Let advice are not regulated by the Financial Conduct Authority.
Time Financial Planning Limited is an appointed representative of The On-Line Partnership Limited which is authorised and regulated by the Financial Conduct Authority.
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