The world economy is suffering a slowdown from Beijing to Berlin, while the financial markets are bearish and volatile. So much economic uncertainty makes it challenging to find suitable investment opportunities.
New research from property-backed lending investment specialists BondMason shows people still have great trust for investments backed by ‘bricks and mortar’ and property continues to be a popular asset class with investors due to historical long-term growth coupled with the fact that UK property values tend to remain resilient during periods of economic downturn.
With the impact of tax changes on buy-to-rent continuing to affect smaller property investors, many previous ‘would-be’ landlords, as well as passive and more casual investors, are now looking to invest in property through funds and structured products.
The good news is that there is a growing range of innovative products and wrappers, allowing private investors to access unlisted and uncorrelated investment opportunities that once were the domain of institutional investors alone.
Listed funds and trusts
Investing in property for private investors has tended to mean purchasing property directly or investing in listed funds and trusts. These listed funds remain popular to gain exposure to property.
- Commercial property funds invest in commercial property, such as retail, office blocks and warehouses. Yields can be higher than those available from the residential market, but there are associated risks. Commercial property can stand empty for longer than residential, in between tenants.
- Residential property funds and trusts offer exposure to the UK residential market through flats and houses within the rental sector. With this option you can benefit from diversification as you’ll have a share of many different properties; that way, one underperforming building shouldn’t ruin your portfolio.
- Indirect property funds focus on the shares of firms within the property and property development sector, rather than physical bricks and mortar. In this case, their performance is linked more closely to the wider share market and the trading performance of these firms rather than the value of property and the income that it generates.
With all these options, capital is at risk and investors don’t have control over the underlying assets held. Listed funds generally offer clear pricing and you can typically liquidate your investment to cash, however there may be costs or fees involved, as well as timing considerations. If a large number of investors attempt to cash in at the same time, this could force some property funds to suspend trading, or move to bid pricing as in 2016 following the UK’s vote to leave the EU.
Correlated versus uncorrelated
Traditional listed funds typically follow the broader market movements regardless of the underlying asset values. Financial innovation is delivering more options for investors looking for alternatives. Such as:
Unlisted funds were traditionally available for institutional investors only, but recent innovation of financial products and following the Markets in Financial Instruments Directive (MiFID II), the adviser market has been more receptive to these funds and more individual investors have been able to participate. As unlisted funds are not traded on an exchange, their price is not subject to daily price volatility, and they trade at a value closely linked to their net asset value (NAV).
Investments in unlisted funds are generally illiquid, and many have ‘lock-in’ periods. However, recent innovation has seen unlisted funds offer weekly trade points, an improvement from the traditional quarterly or semi-annual liquidity cycle.
The Financial Conduct Authority (FCA) has just closed its consulting phase on the rules governing funds that invest in assets with little underlying liquidity, reflecting the increasing demand for these products.
Crowd-funded real estate
Crowd-funded real estate Special Purpose Vehicles (SPVs) allow investors to select individual properties to invest in. Whilst the selection allows more control, the pipeline of investments is not guaranteed or necessarily suitable for the investor’s objectives, so it takes time to create a portfolio.
Pricing is linked to NAV, but such SPVs are not readily saleable securities. Where liquidation is possible, the proceeds can be lower than market value, and trading fees can be significant.
We expect growth in this area from many buy-to-let investors exiting their directly held portfolios and moving into structured and intermediated products.
Property-backed lending provides an opportunity to earn a passive income from property, with the potential for attractive risk-adjusted returns. Property loan investments range from buy-to-let through to wide ranging property development, such as building hundreds of homes on a greenfield site.
When choosing which property loans to invest in, investors should ensure they understand the nature and scope of the underlying project, for instance whether it needs planning permission. Keep an eye on the loan-to-value ratio and pay particular attention to the valuation, is it independent, conducted by a professional surveyor adhering to red-book processes, and does it stack up with local property sales.
Despite a recent spike in property fund outflows, property remains one of a relatively few consistent positive performers for investors over recent years. Some allocation to property remains a sensible investment choice within a well-diversified investment portfolio, offering attractive yields relative to cash and fixed income.
Depending on the investment structure, property can offer useful diversification, and with its negative correlation to other investment assets, it helps mitigate the effects of volatility of other asset classes.
Crucially, long-term investors who view property beyond its illiquid nature will recognise that, regardless of any immediate negativity following Brexit (or lack thereof), property assets are an excellent investment in general.
Anyone who has invested in property, in whatever form, is likely to have seen healthy returns, a fact which should not be pushed aside by recent instability. As with most investment decisions, investors should remain focused on their long-term goals when investing in property or any other asset class.
The challenge with property-backed lending is finding the best method to gain access to returns from this market. Besides the wide range of intermediaries available, the diversity of platforms and the available loan types can be confusing and somewhat off-putting for investors. That’s where BondMason comes in.
Clients have achieved attractive risk-adjusted net returns of 6% p.a from property-backed lending, every month since 2015. Defaqto have awarded the service a 5-starred rating, saying BondMason “provides one of the highest quality offerings on the market”.
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