Thinking of Buying a Commercial Property Fund? You Must Understand This Critical Point
August 2006
Whether rightly or wrongly in the current market conditions investors have continued to pile into property funds. But not all property funds are the same, in fact contrary to some investors beliefs many properly funds do not invest directly in property at all.
So if you're going to invest in property funds on the stockmarket make sure you understand the critical points discussed in this article.
Two Ways That Property Funds Van Invest in Property - Direct Or Indirect
Direct Investment - this is where the fund physically buys property. For example, a fund may buy a collection of large office blocks or retail developments such as shopping malls
Indirect Investment - this is where the fund buys shares of companies that directly invest in property. For example, the ABC property fund buys shares in stockmarket quoted companies who themselves own property.
Why This Information Is Important
- Recent property market analysis by the fund manager New Star Asset management highlights that there is little to choose from in the performance of commercial property funds which invest directly or indirectly - both have returned around 11% per annum over the last 15 years
- But it's the volatility of each separate investment vehicle that investors should be aware of
- The volatility of those funds directly investing in commercial property was by a long way the lowest of any asset class including gilts
- This means that property funds that indirectly invest in property via buying shares on the stockmarket carry a far higher level of risk without a correspondingly higher level of return as the new Star Asset Management research proves
- Therefore the risk and difference between property funds that invest in directly or indirectly should not be overlooked
Advice For Investors
If investors are choosing property in order to diversify their exposure to financial assets (mainly the stockmarket) they should fully understand what type of funds they're buying and generally look to invest in funds that buy physical property.
But note because the stockmarket has generally been performing well over the last few years indirect property funds have out performed those funds that invest directly in property. This is simply because indirect funds are well correlated to the overall market.
Property funds can therefore be generally summed up as follows -
Aggressive - Those funds that buy shares of property companies - in a rising stockmarket these will likely out perform funds that invest directly in property
Defensive - Those funds that buy actual property such as office buildings etc. In a bearish stockmarket environment these funds will likely out perform those funds that have a strong correlation to the stockmarket. Note that 'outperform' does not always mean higher, a fund that returns a negative 6% has 'outperformed' a fund that shows a negative 11% for the year
Summary
The difference between property funds that directly or indirectly invest in property is a subtle one. But the research shows that investors who fail to either understand this difference or worse blindly invest in commercial property funds (thinking they’re all pretty much the same) could be exposing their capital to more risk than they first thought.
If you want to do some further detailed research into this topic then check out this guide commissioned by the Investment Property Forum entitled Understanding Commercial Property Investment
See Also
|
