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22 April 2016

How to invest in property without the mortgage

By Darius McDermott, Managing Director

UK investors have had a long love affair with property. Buy-to-let loans have seduced young and old and skyrocketing prices have fuelled the fire. The relationship may be about to hit a rough patch, however.

Last year’s budget brought warning signs: rising stamp duty and reduced tax advantages for buy-to-let owners. These are measures aimed at cooling the market and preventing first-home buyers from being priced out entirely.

Additionally, the Bank of England just this week reiterated concerns around many buy-to-let borrowers’ ability to maintain repayments if and when interest rates eventually rise. Stricter lending standards have been proposed.

In this context, investing in property—at least through the ‘traditional’ bricks and mortar channel—may become less and less accessible.

But there’s another way to get into the market – through a property fund. If you want exposure to the asset class, but without the worry of a mortgage and the responsibility of a landlord, it may be a smart alternative. Property funds are diverse and there are a number of ways to play the sector.

Explore Elite Rated Property funds

Commercial buildings

One benefit you probably can’t get on your own is access to commercial property. Investing in a fund that buys and rents out the physical properties themselves can be a good way of diversifying your portfolio without taking on the personal debt.

Because commercial leases tend to be long-term, these types of property funds should have a reasonable level of immunity to short-term market ups and downs, and provide a relatively stable income stream.

Brexit is causing a few ripples in this space. If we do vote to leave the European Union, the pound is predicted to fall and remain volatile for some time. This may discourage foreign investment, which has financed quite a bit of our commercial real estate development in recent times.

However, to my mind, a fund such as the Elite Rated Henderson UK Property Trust, with a strong track record of delivering consistent yield throughout market cycles, is still a valuable diversifier for the long haul.

Listed companies

Another way to go is a fund that invests in property-related equities. This could be companies such as house builders and construction materials manufacturers, as well as listed real estate investment trusts (REITs).

Keep in mind that over the short-term, returns from these kinds of funds can be closely correlated to equities as holdings will be impacted by broader stock market movements. The idea is that over the longer term, however, the companies’ earnings growth and returns should be more closely linked to the housing cycle. Or, in the case of REITs, again to the underlying properties themselves.

One fund that stands out is the Elite Rated F&C Real Estate Securities. It offers access to both the UK and major European listed property markets. It is slightly unusual in that it both buys shares in companies it believes will do well and takes short positions against companies it thinks are not going to do so well. Taking a short position is one way fund managers seek to deliver returns for their investors in both up and down markets.

Geographic diversity

Given the uncertainty around the outlook for property if Brexit does go ahead (as well as aforementioned concerns around a heated residential market) some international property market exposure seems sensible.

You could buy a house in Spain. But if you’re not planning your imminent retirement it’s probably not immediately useful, plus investing a lump sum in a single country hardly counts as a diversified portfolio.

Another fund offering geographic diversity across the continent is the Elite Rated Premier Pan European Property, which provides access to Europe’s strongest markets in Germany, France, Sweden and Switzerland.

Of course, you can also find property funds with a more global focus or an Asia Pacific focus, for example, depending on your interest – although we don’t currently have any Elite Rated funds investing in these areas.

None of these options are without risk, nor are they an exact substitute for buy-to-let investing, but for investors that may not have the capital (or the inclination) to commit to a mortgage in the current environment, they are definitely worth considering.

Where to next?

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.

©2016 FundCalibre Ltd. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of FundCalibre Ltd, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by FundCalibre Ltd, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. FundCalibre Ltd shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use.