The world economy is suffering a slowdown, from Beijing to Berlin, while the financial markets are bearish and volatile.
Investors are faced with flat interest rates continuing – the market is not expecting interest rate rises in a meaningful way.
Meanwhile, a slowdown in consumer spending is leading equity markets into a downward trend as the bull run fades and volatility continues.
On top of this, the property market is slowing – including a drop in top-end London prices reverberating downwards and outwards through the UK market.
So much economic uncertainty and global market correlation makes it challenging to find suitable investment opportunities.
However, our research shows people still have great trust for investments backed by ‘bricks and mortar’, and property continues to be a popular asset class with investors and their advisers due to historical long-term growth – having generated a return of 10.9 per cent a year since the 1970s.
As property prices are not necessarily correlated to the stock market, UK property values can remain resilient during periods of economic downturn.
With the impact of tax changes on buy-to-rent continuing to affect smaller property investors, many previous ‘would-be’ landlords, as well as passive and more casual investors, are now looking to invest in property through funds and structured products.
The good news is that there is a growing range of innovative products and wrappers, allowing private investors to access unlisted and uncorrelated investment opportunities that once were the domain of institutional investors alone.
Listed funds and trusts
Investing in property for private investors has tended to mean purchasing property directly or investing in listed funds and trusts. These listed funds remain popular to gain exposure to property:
• Commercial property funds invest in commercial property, such as retail, office blocks and warehouses. Yields can be higher than those available from the residential market, but there are associated risks. Commercial property can stand empty for longer than residential.
• Residential property funds and trusts offer exposure to the UK residential market through flats and houses within the rental sector. With this option clients can benefit from diversification as they have a share of many different properties.
• Indirect property funds focus on the shares of companies within the property and property development sector, rather than physical bricks and mortar. In this case, their performance is linked more closely to the wider share market and the trading performance of these companies, rather than the value of property.
The types of properties within funds is an important consideration. For instance, offices and warehouses could generate good returns in 2019, but High Street properties are under pressure.
Similarly, with residential property clients may want to know whether they have exposure to the top end of the market and central London as some areas have decreased in value – and this may reverberate into other regions in 2019.
With all these options, capital is at risk and investors do not have control over the underlying assets held. Listed funds generally offer clear pricing and clients can typically liquidate their investment to cash.
However, there may be costs or fees involved, as well as timing considerations. If a large number of investors attempt to cash in at the same time, this could force some property funds to suspend trading – or move to bid pricing – as in 2016, following the UK’s vote to leave the EU.
Correlated versus uncorrelated
Traditional listed funds typically follow the broader market movements regardless of the underlying asset values. Financial innovation is delivering more options for investors looking for alternatives, such as:
• Unlisted funds, which are traditionally available for institutional investors only, but following Mifid, the adviser market has been more receptive to these funds and more individual investors have been able to participate.
As unlisted funds are not traded on an exchange, their price is not subject to daily price volatility, and they trade at a value closely linked to their net asset value.
Investments in unlisted funds are generally illiquid, and many have ‘lock-in’ periods.
The Financial Conduct Authority has just closed its consulting phase on the rules governing funds that invest in assets with little underlying liquidity, reflecting the increasing demand for these products.
• Crowd-funded real estate special purpose vehicles, which allow investors to select individual properties to invest in. While the selection allows more control, the pipeline of investments is not guaranteed or necessarily suitable for the investor’s objectives, so it takes time to create a portfolio.
Pricing is linked to NAV, but such SPVs are not readily saleable securities. Where liquidation is possible, the proceeds can be lower than market value, and trading fees can be significant.
We expect growth in this area from many buy-to-let investors exiting their directly held portfolios and moving into structured and intermediated products.
• Property-backed lending, which provides an opportunity to earn a passive income from property, with the potential for attractive risk-adjusted returns. Property loan investments range from buy-to-let through to wide-ranging property development, such as building hundreds of homes on a greenfield site.
When choosing which property loans to invest in, investors should ensure they understand the nature and scope of the underlying project – for instance, whether it needs planning permission.
What does the near-future hold?
We expect to see an increase in choices available to enable homeowners to use their house to generate income and release capital.
There are many more homeowners using equity release mortgages to access capital – whether that is then used to invest in the home or elsewhere.
The latest figures show that £4bn of capital was unlocked between October and December by equity release mortgage holders, according to figures published by the Equity Release Council.
Innovation increasingly allows people to ‘sweat their home as an asset’. Just 10 years ago it was inconceivable that households would be making money by letting their spare rooms to tourists. There are now services to let your garage out as storage space, or driveway for parking.
We are beginning to see this innovation creating more investment opportunities for investors too, which may in turn lead to further opportunities for homeowners looking to access the capital tied up in their own property.
Some advisers are already considering these increased investment choices when looking to optimise risk-adjusted returns for their clients.
Source: FT Adviser