David Prosser explains the advantages investment companies offer to investors seeking exposure to property.
Buy-to-let property investors are an evangelical bunch. Despite the headwinds buffeting the sector – including stuttering house prices, a series of tax increases and new regulation – almost three-quarters are convinced that buy-to-let property still offers better prospects of stable and profitable long-term investment returns according to a survey published this week.
Maybe they’re right. But for investors who really want exposure to bricks and mortar, a self-managed portfolio of properties is rarely the best option. Instead, the investment companies industry, which offers access to both residential and commercial property through collective vehicles managed by professionals will often be a better bet.
There are a whole host of reasons for this. At a fundamental level, most investors do not have the expertise or the resources to build and manage a well-diversified portfolio of individual properties. As a result, their money is tied up in a handful of buy-to-lets – or very often a single property – substantially increasing their risk exposure. By contrast, a fund structure, in which investors’ money is pooled, gives you access to much greater diversification.
Then there is the question of liquidity. Anyone who has ever bought or sold a home knows it can be a time-consuming and often costly process. That’s no different for buy-to-let investors, who cannot be certain they will be able to cash in their investment at a time of their choosing. Again, a fund offers a more attractive alternative; investors who want their money back simply sell their shares.
Tax is another factor to consider. The buy-to-let sector has been hit with a string of new tax charges in recent years, plus investors have to worry about capital gains tax on their profits. Investment companies, on the other hand, don’t usually pay corporation tax on their profits – assuming they pay income received out as dividends to shareholders. And investors don’t have to pay income or capital gains tax if they hold their funds in an individual savings account.
Choice is an important consideration too. Buy-to-let investors have traditionally focused on very conventional residential property that they then let out to tenants. But this is just one small part of the broader property sector. Investment companies offer access to many other sub-sectors – specialist residential property such as student housing or retirement homes, for example, but commercial property too. Very often, these sub-sectors will offer a more attractive investment profile than buy-to-let, plus they give diversification benefits.
Not all funds are the same. A closed-ended investment company is better suited to property investment than an open-ended fund, where liquidity can be an issue. In the latter, if too many investors want their money back at the same time, the manager may be forced to try to sell property in a hurry, potentially at disadvantageous prices. This caused real problems in the wake of the Brexit referendum, for example. In a closed-ended fund, where investors exit by selling their shares, this isn’t a problem.
That distinction aside, it’s important to be realistic about property. The buy-to-let boom reflected the peculiarly British fascination with house prices, but for many people it will not offer the riches they had hoped for. A fund-based approach to property investment may not feel quite the same – but for most people it will be the better option.