Pick a moment and hold on for property gains
WITH the trajectory of the UK real estate market far from clear, property investment might seem like a risky business. But many UK property-tracking exchange-traded funds (ETF) have nonetheless seen steady asset inflows in the last year since prices began to recover in 2009. ETFs offer exposure to property without the long-term commitment of buying the asset directly, which, with so much uncertainty, is proving popular.
iShares accounts for the lion’s share of the property ETF market in the UK, with 70 per cent of assets under management (AUM) in this area in iShare funds. They have seen their property ETF AUM grow by £395m since last autumn, with much of the flow going into overall global and UK funds. These ETFs target the property market by tracking a particular subset: the FTSE index of real estate investment trusts (Reit).
This distinguishes investing in a property ETF from investing in real estate more generally, the most obvious difference being that your exposure is to commercial, rather than residential, property. Reits, however, are a specific subset of commercial property: Execution Noble points out that while the UK’s largest Reit, Land Securities, has a portfolio worth £9.5bn, the value of Tesco’s real estate alone dwarves this at £34.6bn. So while property ETFs don’t provide complete coverage of the market, they do offer the ability to track the biggest investors for whom property is their sole asset class rather than investors like Tesco for whom owning real estate is a side effect of its retail business.
Tracking Reits also offers the advantage of liquidity, which is attractive in such uncertain times. For example, near the end of 2009, after low interest rates and stimulus projects resulted in a rise of property prices, many property investors wanted to capitalise on this modest recovery. Direct property investment and many non-Reit property funds, however, do not offer an easy way out: selling an office block can take a while and, at the beginning of the year, many property funds had to prevent withdrawals because of excessive outflows. And as iShares’ Nizam Hamid points out: “Total returns in the UK’s physical direct investment index last year rose by 16 per cent whereas property ETFs rose by 62 per cent.”
This sensitivity could also mean, of course, that losses are similarly exaggerated, so the overall question is whether property is a good bet at all. Despite the upsurge of prices last year, Better Capital’s Jon Moulton believes there are many reasons to fear for the near-term due to the likelihood of an interest rate rise. As evidence, he cites the fact the current 0.5 per cent rate is historically low, especially given the ever-present risk of inflation. A rise could slam loans and property hard.
With such volatility, however, an opportunistic investor who picks the right moment to buy into a property ETF and who can afford to hold out for the long-term could stand to make a good return. James Cannon of Cannon Capital, an auctioneer for mostly commercial property investors, says that even though much of the boom-time speculation has gone, there is still a lot of entrepreneurial demand for properties that will deliver long-dated rental income in the 10-15-year range. He says: “In the last 12 months we’ve been at the bottom of the market. No one’s saying we’re going to skyrocket out, but if you’re living in Europe, English property is now good value (compared to 2007). We’ve had two major price adjustments so it’s now looking good value for a UK investor.” And with a property ETF, even if the market does look like it is turning too sour, you can at least cut your losses quickly.