Funds Guides

Investing in Property: REITs Vs Property Funds

Property Funds and Real Estate Investment Trusts offer a great way to invest in property without actually owning the property yourself. Just like being a landlord yourself, they work on primarily the basis of providing an income through charging of rent to tenants.

Firstly, it’s important to understand the general nature of the property in relation to the economy. If a economy is doing well, then the price of property tends to do well. For example, if there is lots of business activity, then demand for commercial or business property tends to increase. This permits higher charges. If the economy is doing badly, this pushed down for demand for property and subsequently the rates.

When it comes to investing in property (via non direct-methods), investors tend to use one of two ways:

Property Funds: under scrutiny

Funds of this type will invest directly into physical property. However, Property Funds have come under much scrutiny over recent years due to their very nature. Big-commercial properties are expensive; deals take a long time to sign and they are dependent on the state of the economy.

Given since the Global Financial Crisis there has been particularly strong levels of volatility, Property Fund Managers have often seen investors wanting to take their money out of Property Funds because Property tends to take a negative hit. Imagine a large amount of investors want their money back suddenly – the only option the Property Fund Manager is to sell the assets it bought – but this can take time due to the nature of the property. And it’s usually the good properties or best investments that get sold to do this as they sell quickly.

It is for this reason that Property Funds have hit the headlines in recent years regularly as trading of the Funds can be suspended until the Fund Manager can sort out the issues. This means you can’t get your money back as quickly as you’d like and it may be much less.

Rise of the REITs: more fluid

A Real Estate Investment Trust (REIT) solves one major problem as its an Investment Trust – as a fund it is run as a closed-ended company and trades on the Stock Exchange. If you want to sell your investment, you will be able to.

REITs can provide a good income and while part of the same overall sector, the different nature of property investments means that some can perform far better than others in a downturn. A Retail REIT would perform badly during a downturn (less demand for retail units such as shopping malls and outlet centers). A Healthcare REIT would arguably be less immune to a general downturn in spending than the retail sector and deal with different dynamics.

Other areas of specialism include but are not limited to Infrastructure REITs, Office REITs, Student Property REITs (you get the idea…).

As you’d expect, REITs can offer very good dividend yields (5%+) – although this is not guaranteed and it’s important to understand the prospects generally of what type of property they are investing in.

However, they are not immune to the changes in their price. If the assets that a REIT invests in falls below its shares, then it is said to be trading at a ‘discount’, if the value of its assets rises above its its share price, then they are trading at a ‘premium’.

Go for REITs

REITs are the most logical choice for you as an investor if you are seeking an income from property (but without actually owning the property). They have clearly defined sub-sectors of property, can easily be bought and sold and look to provide a good dividend yield primarily.

Property does have a part to play in a diversified portfolio – but just lookout for signs of general downturns in the market and what that could mean for your investment. However, just like with defensive and cyclical stocks, not every part of the property market is affected in the same way.

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