Listed property companies offer private investors a potentially high income stream and portfolio diversification – but performances can vary significantly, advisers warn.
Real estate investment trusts, or Reits, are listed companies that invest in physical commercial property, such as offices, shopping malls, retail warehouses and industrial units.
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“Reits offer retail investors access to an asset class that should provide an income, some diversification from equities and an element of inflation protection over the longer term,” notes Mick Gilligan of broker Killik & Co.
The sector launched in the UK five years ago and, despite attractive tax benefits – companies are exempt from corporate tax on income and capital gains – has struggled to take off following the economic downturn.
Advisers warn that investing in property via a Reit can be significantly more volatile than direct property investment or managed property funds.
“They are effectively equities and can therefore be just as volatile,” explains Darius McDermott, managing director at Chelsea Financial Services, a financial adviser.
But experts argue that Reits can be a cost-effective way of gaining exposure to physical property. Shares in Reits can be bought through a stockbroker or a share trading platform and are more liquid than bricks and mortar funds.
Over the longer term, they can also offer diversification benefits. However, Henry Lancaster, senior investment analyst at Coutts, says investors need to hold investments for up to three years for their correlation to the property market to become evident.
Investors are advised to consider carefully the nature of the investment because there can be broad differences between companies – and, as a result, their performance.
“Ultimately they are dependent on the performance of their portfolios and this, in turn, is tied into the fortunes of the economy,” says Tim Cockerill, head of collectives research at broker Rowan Dartington.
Price returns vary: Standard Life Investment Property Income and F&C Commercial Property have returned 5.08 per cent and 5 per cent, respectively, over the past year, while British Land and Land Securities have returned -7.68 per cent and -8.13 per cent respectively. Many UK Reits continue to trade at a discount to net asset value (NAV).
Yields also differ significantly between companies. Standard Life Investment Property Income currently yields 7 per cent, while British Land yields 4 per cent. Most typically yield between 2 and 6 per cent, with some as high as 10 per cent.
“While Reits continue to trade at a discount to their NAV their fundamentals remain solid, and many UK Reits have an extensive development pipeline in areas of strong demand and constrained supply like the City of London,” explains Peter Cosmetatos, director of finance at the British Property Federation.
Cockerill says Standard Life Investment Property Income and F&C Commercial Property Trust are high quality long-term income generating investments. However, he cautions that he would not buy them now as both are trading at premiums of about 6 per cent.
Gilligan recommends London & Stamford Property, which has recently bought more properties in London and the south east, and Hansteen Holdings.
Reits can also offer private investors a way to gain exposure to international property. “In the UK we will buy both bricks and mortar funds and Reits, but the latter are the preferred option for investing globally,” explains Lancaster.
Tom Becket of PSigma Investment Management says private investors could look at investing in Reits that provide some inflation protection. “Germany and Japan are two markets where we have been looking at commercial property for inflation protection,” he notes.
However, some advisers caution against committing money to Reits in the
current environment. “Broadly, we are still avoiding commercial property globally, as we do not believe the yields on offer compensate you both for the liquidity of the underlying investments in the Reits or the Reits themselves,” says Becket.
“Unless we were to become genuinely convinced of a re-acceleration of global economic activity, we are unlikely to soften that stance, particularly as in the UK and Europe many of the financial institutions are yet to address the property issues they collected in the boom years of the last decade.”
The woes of the eurozone have impacted many European Reits. “Many were launched a few years back and were highly geared going into the credit crisis, which created major difficulties,” says Cockerill. He points out that Invista European Real Estate Trust has fallen in value by over 90 per cent since launch.
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