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How to Invest in Real Estate

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Publication Type: Investment Cases , Investments
How to Invest in Real Estate

In this blog, we consider how investors can take exposure to property as an asset class by investing in either open-ended or closed-end funds.  It is likely that physically-owned property is one of the biggest single investments that many investors will make, indeed there are some who will have additional exposure through the ownership of rental properties and/or second homes.  We are not going to look at direct property purchases, which typically involves taking on some form of borrowing via a mortgage, possibly the most common way individuals make use of leverage in their lives.

The reason why investors look at property as an asset class is that it can provide diversification and a potentially reliable source of income.  An investment in bricks and mortar is typically seen as quite safe, but this is not necessarily the case as the global financial crisis of 2007-2008 and the Covid-19 global pandemic have demonstrated.  Each has affected property values in different parts of the property market, serving to demonstrate that property investing is not without risks and highlighting the importance of being selective.

In this blog, we’ll look at some of the different property segments into which an investor can potentially put money.  First, let’s look at the structures that can be used to by asset management firms who have property funds.

Open-ended funds

  1. Mutual funds such as unit trusts and OEICs

These vehicles are well-established in the UK and rest of Europe.  They are not listed on a stock exchange so an investor can only buy and sell units directly from the fund group behind the fund. 

Where a fund is investing in physical property, it will always retain a cash reserve, in case there are more sellers than buyers so that they can always meet the need to pay out cash to investors who are selling units.  The cash reserve may not be sufficient when markets are stressed, situations where the number of sellers may grow rapidly and there is little if no interest in buying units.  In such circumstances, funds may face the risk of having insufficient cash to meet the need to pay sellers, and, because of the liquidity mismatch, funds can effectively suspend or ‘gate’ a fund, meaning that it is not possible to sell units.

In the UK, the Financial Conduct Authority is currently consulting on proposals “to reduce the potential for harm to investors from the liquidity mismatch in open-ended property funds.” It is looking at a proposal that would require investors to give 180 days’ notice to redeem a holding.  The idea behind the FCA’s proposal is that by creating a sufficiently long notice period, the fund manager would potentially have time to sell assets if there is a significant level of selling.

Some funds will invest in listed property companies, in which case the issues outlined above would not arise because the shares of the property companies are traded daily on the stock exchange.

  1. Exchange Traded Funds

There are a number Exchange Traded Funds (ETFs) track indices made up of listed property companies, they can have a global, regional or country focus.  The following table shows ETFs listed on London Stock Exchange that track different real estate indices.

Product name ISIN Ticker

Dow Jones Global Select Real Estate Securities

   

SPDR Dow Jones Global Real Estate UCITS ETF

IE00B8GF1M35

GBRE

SPDR Dow Jones Global Real Estate UCITS ETF Accumulating

IE00BH4GR342

GLRA

FTSE EPRA/NAREIT Developed

   

Amundi ETF FTSE EPRA NAREIT Global UCITS ETF DR

LU1437018838

EPRA

HSBC FTSE EPRA/NAREIT Developed UCITS ETF USD

IE00B5L01S80

HPRO

FTSE EPRA/NAREIT Developed Asia Dividend+

   

iShares Asia Property Yield UCITS ETF

IE00B1FZS244

IASP

FTSE EPRA/NAREIT Developed Dividend+

   

iShares Developed Markets Property Yield UCITS ETF

IE00B1FZS350

IWDP

iShares Developed Markets Property Yield UCITS ETF USD (Acc)

IE00BFM6T921

DPYA

FTSE EPRA/NAREIT Developed Dividend+ (EUR Hedged)

   

iShares Developed Markets Property Yield UCITS ETF EUR Hedged (Acc)

IE00BDZVHD04

DPYE

FTSE EPRA/NAREIT Developed Dividend+ (GBP Hedged)

   

iShares Developed Markets Property Yield UCITS ETF GBP Hedged (Dist)

IE00BDZVHC96

DPYG

 

Closed-ended funds (Real Estate Investment Trusts and Investment Trusts)

Real estate investment trusts (REITs) invest in physical property on behalf of its shareholders.  REITs are exempt corporation tax on rental profits and gains from their UK property rental business.  They must distribute 90% of their net property rental income to investors.  REITs listed on London Stock Exchange have exposure to sectors including industrial, warehouses, office, residential, student accommodation, social housing and health care.  Investment trusts invest in listed property companies, including REITs.

Both structures are listed on stock exchange so trade continuously throughout market hours.  They do not face the potential liquidity issues associated with open-ended funds.  The level of investor interest will be reflected in the discount / premium of the trust to its net asset value (the value of the properties in the portfolio).  If there is significant demand for a particular sector, then trusts in that sector may trade at a premium.  Conversely, if a sector is out of favour, then the trusts in that sector may start to trade at a significant discount.  This might occur if the trust has significant borrowings and is in a sector that faces potential difficulties.  In 2020, this was the case for REITs exposed to the traditional retail sector, e.g. Intu Properties, which went into administration in June, and NewRiver REIT (NRR).

REITs

In this section we highlight some REITs listed on London Stock Exchange

REITs in FTSE 100

Name

Ticker

Market Cap (28 Sept)

Segment

Segro PLC

SGRO

£11,229.34m

Warehouse and industrial

Land Securities Group PLC

LAND

£3,636.19m

Office, retail and leisure

British Land Company PLC

BLND

£2,983.95m

Office and retail

 

Specialist REITs (members of Association of Investment Companies)

Here we look at the largest three REITS in two major segments of the UK market

Commercial

Name

Ticker

Market Cap (28 Sept)

Segment

Tritax Big Box REIT

BBOX

£3,764.3m

Logistics

UK Commercial Property REIT

UKCM

£1,341.8m

Industrial, office, warehouse and retail

BMO Commercial Property

BCPT

£1,268.3m

Office, retail, retail warehouse, industrial, alternative

 

Residential

Name

Ticker

Market Cap (28 Sept)

Segment

GCP Student Living

DIGS

£774.9m

Student accommodation

Civitas Social Housing

CSH

£775.0m

Social housing and healthcare

PRS REIT

PRSR

£454.8m

Private rented sector

 

There are also a number of REITs that provide exposure to property in Europe, e.g. Phoenix Spree Deutschland (PSDL), Tritax Eurobox (BOXE), Aberdeen Standard European Logistics Income (ASLI)

Summing up and final thoughts

There is no question that property can be a good source of diversification and income but it is important to be selective.  Just think of the impact of the global pandemic:  it has been a boon for ecommerce and the companies in the ecommerce ecosystem, think Amazon (AMZN) and Facebook (FB) and certain companies in the warehouse logistics sector, while painful for traditional retailers and companies involved in leisure and hospitality.  At the same time, the pandemic has brought changes to working practices.  BP (BP.), the oil major, for example, announced in August that it was selling its London Headquarters in St James’s Square as it downsizes and moves to flexible working practices.  It is far from being alone and the need for office space for companies of all sizes is likely to be very different in the years ahead.

Against this backdrop of change, the good news is that investors have plenty of choice across the different segments of the property sector. 

For a list of REITs on London Stock Exchange, please click here.  To find out more about some of the closed-ended property vehicles listed on London Stock Exchange that are members of the Association of Investment Companies, please click here and look under the various Property search options.

If you are you a sophisticated investor looking for alternative investment solutions, then GraniteShares short and leveraged single stock ETPs could be exactly what you’ve been looking for!


GraniteShares accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this blog or the contents. GraniteShares Limited (“GraniteShares”) (FRN: 798443) is an appointed representative of Duff & Phelps Securities Ltd. (FRN: 466588) which is authorised and regulated by the Financial Conduct Authority.

 

This blog does not constitute an offer to buy or sell or a solicitation of an offer to buy securities in any company. Nothing contained herein constitutes investment, legal, tax or other advice nor is to be relied upon in making an investment or other decision. No recommendation is made positive or otherwise, regarding individual securities or investments mentioned herein. Any summary list of risk factors does not purport to be a complete enumeration or explanation of the risks involved in a particular investment. Prospective clients must consult with their own legal, tax and financial advisers before deciding to invest. This email contains the opinions of the author and such opinions are subject to change without notice. The source of data is GraniteShares unless otherwise stated. No guarantee is made to the accuracy of the information provided which has been obtained from sources believed to be reliable. This email and the information contained herein is intended only for the use of persons (or entities they represent) to whom it has been provided. Past performance is not a reliable indicator of future results.  The value of an investment may go down as well as up and can result in losses, up to and including a total loss of the amount initially invested. Investments may involve numerous risks including, among others, company risks, general market risks, credit risks, foreign exchange risks, interest rate risks, geopolitical risks and liquidity risks.  Please note that GraniteShares short and leveraged Exchange Traded Products are for sophisticated investors.

 

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