The world has been obsessed with property for decades. The industrialist Andrew Carnegie once declared that 90% of the world’s millionaires had made their money from real estate. Although he expressed this view more than a century ago, the asset class is still widely regarded as one of the better longer-term investments.
But what do you need to know about putting your money into this area? What kind of investor is best suited to property and how much risk should they take?
Our guide to property explains what property investment involves, highlights key trends, assesses the pros and cons, and suggests investment funds worth considering.
What is property investing?
Millions of people already invest in real estate through owning their homes – but the property sector includes more than just the place they sleep each night. Broadly speaking there are two ways to get involved.
The first is through buying, selling, and letting out actual bricks & mortar buildings. This can include residential homes, office space, and hotels, as well as even larger-scale developments such as shopping centers and warehouses. The second is by investing in real estate securities. This means buying the shares of property-related companies that are traded on global stock markets. They will be involved in areas such as property development, healthcare infrastructure, global data centers, shopping malls, and other related investments.
Both routes have their various pros and cons, which we’ll cover in the next section. However, the longer-term goal is the same: to make a return.
Pros and cons of investing in property
The principal attraction of property – particularly physical bricks & mortar – is enjoying a diversified income stream and the potential for longer-term capital growth. However, no investment opportunity will be a guaranteed route to riches, so here is a list of the potential benefits and downsides of property investing:
Benefits
- Strong income potential
- Possibility of longer-term capital growth
- Good diversification qualities
- Optimistic global outlook
- A rising income stream, often linked to inflation rent rises
Negatives
- Susceptible to economic changes
- Property securities won’t be as diversified
- Market volatility
- Potential lack of liquidity
Outlook for property
Putting money into physical property is attractive to investors wanting both a regular income and longer-term capital growth – but it can be affected by the economic backdrop. According to a report from property specialist JLL, growth has proved to be resilient, despite global economic conditions remaining mixed*.
It read: “Falling inflation and an easing monetary policy environment, combined with solid labor markets, should deliver further improvements to the outlook through the second half of the year and into 2025.”
There’s also a greater sense of optimism surrounding this sector today after a challenging couple of years, according to a report from M&G**. It stated: “For the majority of markets, this year will likely mark the bottom of the cycle and the end of significant capital value falls. With stabilization already emerging, investors are cautiously dipping their toes into the waters once again.”
How to invest in property
Of course, it’s possible to put together your own portfolio of physical properties if you have many thousands of pounds at your disposal. Commercial buildings can be purchased and then let to provide you with a regular income and (hopefully) longer-term valuation increases. However, only the mega-rich are likely to have the financial resources required to purchase anything more than a couple of buy-to-let houses. Separately, it’s possible to buy shares in property-related businesses. However, your success will depend on whether your chosen names perform well. If they fail then you could lose your money.
Choosing a fund
A less risky option for those favoring either the bricks-and-mortar or property shares approach is to invest in a fund with a manager responsible for portfolio selection calls. Another benefit of this route is diversification as funds can hold many more positions. This means returns are less dependent on a relative handful of holdings. You can buy specialist funds focusing on the property sector or opt for a more generalist portfolio that holds real estate alongside stocks from other areas.
So, where should you start? Here we highlight three funds, each with a different approach, that could be worth considering.
Cohen & Steers Global Real Estate Securities
This fund, which is one of the flagship portfolios of Cohen & Steers, seeks to achieve income and capital appreciation by taking a diversified approach. We see this fund as a one-stop-shop way to provide access to what can be a disparate asset class and acknowledge that it benefits from respected analysts in the field.
The US has the most significant geographical exposure of the fund (63%), followed by 9% in Japan, 6% in Australia, and 5% in the UK***. The largest individual holdings are in two real estate investment trusts. Prologis focuses on logistics facilities and Welltower invests in healthcare infrastructure. This fund is a very useful fund for those looking for a safe pair of hands in an asset class that can add good diversification to a wider portfolio.
TR Property Investment Trust
Our next contender is an investment trust that invests in the shares of UK and European property companies – as well as some physical property. Marcus Phayre-Mudge, its experienced manager, has a strong track record and benefits from the support of a dedicated and well-resourced team.
It invests in well-managed real estate investment trusts (REITs), as well as shares of property companies and related businesses.
Given its focus on property shares – around 10% of the portfolio is in physical property*** – the TR Property Investment Trust could make an excellent complement to a brick-and-mortar portfolio. Additionally, 18.7% of the trust is in industrials, with 17.4% in German residential and 12.8% in European shopping centers ***.
TIME: Commercial Long Income
Our final suggestion aims to provide a stable return by primarily acquiring commercial freehold ground rents and property benefitting from long leases. This fund, which is run by Nigel Ashfield and Roger Skeldon, targets an income return of 4% per annum, alongside capital growth.
Commercial freehold property is often let to commercial tenants for 15 to 40 years, while the freehold ground rents are paid by a tenant to a freeholder for typical terms of 60 years plus. Its 10 largest positions include PGL Liddington, an adventure holiday location based in Wiltshire, as well as the Holiday Inn, Southend***. We see this fund as a building block of any income-oriented portfolio that should do particularly well in a low-inflationary and low-interest-rate environment.
*Source: JLL, Global Real Estate Perspective, August 2024
**Source: M&G, Global Real Estate Outlook Mid-Year 2024, 26 June 2024 ***Source: fund factsheet, August 2024
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