Property Funds - A useful portfolio diversifier

An asset class many people favour is property.  Be it owning properties personally or buying a property fund, it can provide an excellent return for your money.  There are a number of ways to access this market within an investment portfolio.

Lets classify this into three different types:

1. Bricks and Mortar Funds
2. Real Estate Investment Trusts (REITs)
3. Property Security Funds

Property is generally uncorrelated to most other asset classes however this can be dependant on which type of investment vehicle you choose.

Bricks and Mortar funds do what they say on the tin, the fund will invest and manage a number of properties directly. These will provide a low volatile fund generating both capital growth through the net asset value of the properties held and rental income.

The next type of investment is a REIT, this is a closed ended property investment trust, where an amount of money is raised and then a fund manager selects a portfolio of property. They are generally run in a very similar way to bricks and mortar funds however, because they are closed-ended, capital is not required to be kept uninvested (for redemptions) therefore these can capture more upside. REITs are however more volatile, as they are listed on the stock market and therefore be subject to supply and demand. Generally they will maintain a close price (discount) to its net asset vale.  Read more on REITs and Investment Trusts.

The final type is a property security fund, these are invested in securities, namely REITs and equities associated with property and these are generally the most profitable and volatile during property bull markets.

The first option will provide you with sturdy incremental gains where as the later two will be more volatile having the potential for greater upside. Each type of investment have their uses, and one would need to clarify why property is going to be added to the portfolio. If you see immediate upside from the property market, REITs and property security funds will be best, however if this is merely to act as a source of steady income and long term capital growth I would suggest the first option. 

Some interesting examples of each type of property fund are Ignis UK Property; a top quartile performing bricks and mortar fund with a focus on London and the South East commerical property.  First State Global Property Securities would be my first choice for a more volatile fund, it invests in a global selection of REITs and companies associated with property.  Finally REITs offer a more sector specific approach to property investment, an example of which would be Primary Health Properties plc, whereby it invests in healthcare focused properties such as GP practices.  Or British Land plc for a more diversified portfolio of properties.

Having looked at our poll about where you would have your money invested, almost 40% said property.  This is unsurpising, especially for our US readers as the property market there is much more buoyant.   Also areas in Asia have seen capital values rise signifcantly espcially in urban areas.  There is certainly a lot of positives within the global property market, however for the UK I am affraid it will stay somewhat subdued for the immediate term.

Pick your markets wisely and your funds even more so!