In praise of property

Have you invested in “beds, sheds and meds”? For those not familiar with the phrase, it refers to several sub-sectors of the property asset class where there is growing interest in potential pockets of value. And if the idea appeals, investment companies offer clear advantages over other possible routes into property.

The case for property is that a sell-off in the sector over the past year or so may have been overdone. There are some good reasons why property has struggled, but there is also an argument that certain areas of the sector should not have been marked down so steeply.

The primary reason that investors in property have suffered – shares in the average UK commercial property investment company have fallen around 20% over the past 12 months – is that interest rates have climbed steadily higher. This has a double whammy effect: not only do higher rates make yields on existing property investments look less competitive, forcing prices down accordingly, but they also increase the cost of borrowing for future investment.

A second headwind is the fallout from the Covid-19 pandemic. People’s behaviours have changed; they no longer want to work in offices or shop on high streets. In which case, demand for office accommodation and retail property is likely to remain depressed.

So far, not so good. But let’s not throw the baby out with the bathwater. First, it’s important to remember that property has a long-term track record of helping investors secure important diversification in their portfolios. It’s a very different type of investment to equities and bonds – not least because there is a physical asset involved. It can continue to play a role in sensible portfolio construction.

Moreover, while you may feel downbeat about the prospects for office and retail property assets – though there are signs that post-Covid behaviours are not as fixed as we thought – there are opportunities elsewhere in the market.

Demand for residential property – “beds” in the phrase above – remains highly elevated as population growth and demographic change continue. The move to online shopping requires investment in logistics and storage, hence the interest in “sheds”. And the healthcare and biotechnology sector is booming in the wake of the pandemic, driving demand for new facilities and accommodation – “meds”.

Property enthusiasts believe these areas of the market can bounce back quickly as investors begin to realise that a generalised sell-off has created opportunities. It’s always difficult to call the bottom of a market, but the key is to focus on the most compelling value stories.

Investors also need to think about how they do that. Property is an illiquid asset – it takes time to buy and sell, particularly when it comes to large commercial properties. That makes it inherently unsuited to open-ended fund structures; these are highly susceptible to market sentiment and may even have to suspend trading if too many investors want to realise their cash at the same time.

An investment company, by contrast, avoids this issue. You’re buying shares in the fund, which you can trade on the stock market whatever is happening to the underlying portfolio. Liquidity is always available.

Some analysts point out that the downside of this approach is that you’re adding to your exposure to equities by buying into a property-focused investment company; this undermines the diversification benefits of a direct property investment, they warn. It’s a fair point, but it’s worth noting that the long-term returns from property-focused investment companies have been much more closely correlated to those generated by direct property than to stock market performance.

Investment companies, moreover, are the only accessible route into diverse areas of the market for many investors – especially if you’re looking for particular opportunities in the beds, sheds and meds arena. A wide range of funds offer both generalist and specialist exposure to UK and international property.