However, after strong returns from both property share and direct property funds, the arguments for property are not as clear cut. Equally, there are a number of new choices for investors. In the current market environment, which type of property investment is likely to be the best choice for investors?
Property still divides into two basic types – direct and indirect – one holding bricks and mortar properties, the other holding shares in property companies, including Reits (real estate investment trusts). However, there are an increasing range of alternative options.
Investment trusts such as the Starwood Real Estate Securities and Custodian Real Estate have proved popular launches, both offering an alternative to conventional commercial property.
There are also a number of passive options, such as the BlackRock Global Property Securities Equity Tracker, which offer access to a basket of Reits.
Within the IMA property sector, property share funds have the edge in performance terms. No bricks and mortar fund appears in the top 15 funds over five years. This might be expected in a recovering economy, given that the equity market is forward-looking and is therefore likely to move ahead of true commercial property valuations.
However, Alex Ross, manager of the Premier Pan-European Property fund argues that there can also be structural reasons why property share funds can outperform on a total return basis: “Property funds tend to get significant inflows when property is rising. Therefore, they can be forced buyers in a high demand market and it can also work against you on the way down.”
There is also the argument that property share fund managers can be more flexible in their asset allocation. Commercial property is geared into the economic cycle, but different types of property are likely to perform well at different points in the cycle.
Property share funds can allocate more effectively between these different asset types – looking to secondary property later in the cycle or prime property early in the cycle. They can even look abroad. Mr Ross, for example, has a high weighting to the German property market. For bricks and mortar funds, it is difficult to make this kind of asset allocation shift swiftly.
Bricks and mortar fund managers, however, might argue that they have the edge when it comes to diversification and income.
James de Bunsen, multi-asset fund manager at Henderson, for example, is confining his property exposure to prime direct property, as an income substitute for parts of the bond market. “We have virtually zero exposure to investment grade bonds, where there is real asymmetric risk, and property offers a way to generate yield. Yields have fallen – from roughly 4.5 per cent to 3.8 per cent, but it still looks good relative to bonds” he says.
Within the IMA sector, the top yielding property funds are all bricks and mortar funds, which have an annual yield of between 3 per cent and 4.6 per cent. The property share funds tend to be total return vehicles rather than income focused.
The Premier fund, for example, pays 2.3 per cent, but Mr Ross says that he deliberately doesn’t focus exclusively on income-generative property because that would rule out a number of the asset management and development options for the fund, where an asset may be in an early stage of development and not yet generating income.
