Money: Where there’s mortar there’s brass

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IT IS still possible to gain from the rising price of property without resorting to selling your home. Over a decade, house prices have risen 29.7 per cent and for those seeking such diversification, property funds will also offer commercial premises.

“Property as an asset class is coming back into vogue owing to the search for yield,” says Michael Jackson of Kelvin Financial Planning. He urges clients to consider property as part of a balanced approach to investment.

While the supply of good-quality accommodation remains low in most markets, this creates opportunities for managers to add value for investors. Commercial property prices outside central London are at levels last seen in the 1990s, providing keen scope for potential.

On the downside, property investments face challenging times in line with the general economy. Many rental yields are flat and some even falling. Direct investments can also suffer from liquidity issues in times of market stress. In the event of a run, there can be restrictions to redemptions which can mean waiting periods to realise capital.

Salvation may come in the form of commercial property. Graeme Robertson, chartered financial planner at advisers Chase de Vere, says: “Commercial property can provide consistent longer-term returns and, coupled with its diversifying nature, provides some protection from stock market falls.”

Robertson’s firm typically recommends exposure of 5 to 12 per cent in client portfolios.

Always check where a property fund invests. Some are based on shares of property-related companies and do not purchase any actual buildings, while others invest predominantly in bricks and mortar. Chase de Vere only selects the latter as they have “far less correlation to the stock market and are less risky than investing in property shares”, says Robertson.

Funds holding actual property is the route taken by most life and pension companies, says Matthew Robbins, wealth management consultant at Edinburgh Investment Consultants. “This can make them ideal vehicles to satisfy this important asset class.”

The top-performing collectives achieved more than 60 per cent in the last three years and in excess of 300 per cent over a decade.

In the last few years, real estate investment trusts (known as REITs) have been created. They invest mainly in property securities rather than actual construction and therefore have less liquidity problems but more volatility.

REITs are used by Dunfermline-based IFA Max Horne to obtain property investments for clients on the basis that the funds invest worldwide. “There is a niche fund we use – the Schroder Global Securities Property fund – which is still producing good returns from a portfolio of investments worldwide,” says Horne.

“My message is to look outside Britain for returns, but this may be a good time to buy into the UK property market at a huge discount. The question is, how long do you have to wait until the funds produce good positive returns.”

Although there is a risk that commercial property may under-perform equities, it brings double benefits: consistent rental income when the property is attractively sited and potential capital growth.

Among property funds, Chase de Vere prefers those which are defensively positioned in good-quality locations – mainly in south-east England – with strong tenants. Robertson recommends Henderson UK Property, L&G UK Property Trust and M&G Property Portfolio.

Jeffrey Deans of Save & Invest also tips Schroder Global Property Income Maximiser to generate high income of around 7 per cent annually. For more conventional exposure to REITs, property companies and global property, he suggests Fidelity Global Property with the reservation.

Deans adds: “There should be no mistakes here – this is a volatile investment proposition but the managers have – aside from a disappointing 2011 – consistently demonstrated their abilities to anticipate and access global property trends.”

As another route, consider funds which replicate a property index. Jackson has clients in BlackRock Global Property Securities Equity Tracker Fund. “It offers low-cost access – just 0.28 per cent annually – to companies associated with the property sector on a global basis,” says Jackson, who adds that it consistently tracks its benchmark.

In research by Lipper specially for Scotland on Sunday, the star funds over three years on a total return basis with dividends reinvested are Investors Global Real Estate (up 81.2 per cent), Raven Russia (up 65.1 per cent), Oasis Crescent Global Property (up 55.3 per cent) and Schroder ISF Asia Pacific Property (up 54.2 per cent).

Over five years on the same basis, the leading collective was the same Investors fund (up 77.9 per cent), followed by Neuberger Berman US Real Estate (up 75.1 per cent). Bricks and mortar in the Far East boosted the returns of the third and fourth places: Schroder ISF Asia Pacific Property (up 70.9 per cent) and Henderson HF Asia-Pacific Property Equities (a 60.8 per cent rise).

To show the power of retaining money in well-managed funds over a decade – with dividends reinvested – TR Property Investment Trust returned 357.7 per cent, followed by two Morgan Stanley funds: Asian Property (a 314.8 rise) and US Property (up 203 per cent).

Several higher-yielding property trusts are on premiums worth more than their underlying assets. F&C Commercial Property Trust says it is “more important than ever for investment decisions to be driven by local markets, individual streets and stocks, rather than geographic weightings and to have a strong focus on the quality of the covenant”.

European property shares outperformed the European equity market last year by 10.04 per cent. Many listed property companies not only offer access to quality real estate but also have appealing balance sheets rebuilt after the economic crisis.

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