Each week we ask an investment expert questions focused on a particular theme. This week Jason Baggaley, deputy head of real estate at Aberdeen Standard Investments, looks at property investing.
Is property a sound investment?
Like any investment, commercial real estate investment has its risks, but it also has a place in a portfolio, as it can provide a regular income stream, as well as potential for capital growth.
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Commercial property such as warehouses are let on leases that provide a rental income to the owner that is normally stable and predictable, especially where there is a diversified portfolio.
The income is secured against the tenant who occupies the building as part of their business. It is a contractual arrangement, so the income should be paid in advance of a dividend. Should the tenant fail then there is a backup, as the investment is in a physical asset, which has its own intrinsic value, and can be re-let to provide a future income stream.
Covid-19 has led to an acceleration of trends that already existed, such as continued stress in physical retail, and an expansion in internet fulfilment and urban logistics, as well as changes in the way offices are used. ESG has also become even more important to all stakeholders.
A portfolio structured to give greater exposure to assets in favoured sectors is obviously more likely to perform well. However investing in funds that only invest in a particular sector places an onus on the investor to call market timing for each sector. A diversified portfolio with the ability to invest across sectors has a greater ability to meet long term investor requirements.
Is property a sound investment? Yes, I believe it is, but it is generally one that should be considered over the medium to long term.
As returns have a strong correlation to GDP, some short term stress can be expected, with the economic environment impacting performance more than longer-term themes, which remain broadly supportive.
That said, a diversified, well managed portfolio should provide investors with a decent income return, and prospects for future capital growth.
What are Real-Estate Investment Trusts and how do they work?
A REIT is a company that invests in property. The REIT status means that if certain requirements are met the company benefits from tax efficiencies, which of course is of benefit to an investor.
One such requirement is for a REIT to distribute 90 per cent of its net rental income, and there are several REITS that focus on providing investors with an attractive level of income. Many of these have an independent non-executive board that appoints an investment manager and ensure the best interest of shareholders are represented.
How can I invest in property through a stocks and shares Isa?
Exposure to commercial real estate can be achieved through investing in funds to give a diversified exposure. These could be listed companies such as REITS where you buy shares in the Company, or through open ended funds where units are bought and sold. Most platforms have property companies and funds on them for investors to choose.
How can I do it through a pension?
In much the same way, pension platforms will enable investors to select a variety of property funds or companies.
What are the downsides? Is it easy to get my money out if things go wrong?
A REIT structure is very suitable for real estate, however, one downside is that over a shorter time horizon, the share price is more closely correlated to wider equity markets and has greater volatility than the unit pricing of open-ended funds (which is based on the asset valuations).
One perceived benefit is that they do provide daily liquidity (through the trading of shares on a listed exchange) and so do not suffer periods of being closed as we have seen with open ended funds.
However that comes with volatility. Share prices may have started trading this year higher than their asset value, yet are trading now at a discount to asset value, thus offering liquidity, but at a price.
Jason Baggaley is deputy head of real estate at Aberdeen Standard Investments.