How to invest in property without the mortgage

UK investors have had a long love affair with property. Buy-to-let loans have seduced young and old and skyrocketing prices have fuelled the fire. The relationship may be about to hit a rough patch, however.

Last year’s budget brought warning signs: rising stamp duty and reduced tax advantages for buy-to-let owners. These are measures aimed at cooling the market and preventing first-home buyers from being priced out entirely.

Additionally, the Bank of England just this week reiterated concerns around many buy-to-let borrowers’ ability to maintain repayments if and when interest rates eventually rise. Stricter lending standards have been proposed.

In this context, investing in property—at least through the ‘traditional’ bricks and mortar channel—may become less and less accessible.

But there’s another way to get into the market – through a property fund. If you want exposure to the asset class, but without the worry of a mortgage and the responsibility of a landlord, it may be a smart alternative. Property funds are diverse and there are a number of ways to play the sector.

Commercial buildings

One benefit you probably can’t get on your own is access to commercial property. Investing in a fund that buys and rents out the physical properties themselves can be a good way of diversifying your portfolio without taking on the personal debt.

Because commercial leases tend to be long-term, these types of property funds should have a reasonable level of immunity to short-term market ups and downs, and provide a relatively stable income stream.

Brexit is causing a few ripples in this space. If we do vote to leave the European Union, the pound is predicted to fall and remain volatile for some time. This may discourage foreign investment, which has financed quite a bit of our commercial real estate development in recent times.

However, to my mind, a fund such as the Elite Rated Henderson UK Property, with a strong track record of delivering consistent yield throughout market cycles, is still a valuable diversifier for the long haul.

Listed companies

Another way to go is a fund that invests in property-related equities. This could be companies such as house builders and construction materials manufacturers, as well as listed real estate investment trusts (REITs).

Keep in mind that over the short-term, returns from these kinds of funds can be closely correlated to equities as holdings will be impacted by broader stock market movements. The idea is that over the longer term, however, the companies’ earnings growth and returns should be more closely linked to the housing cycle. Or, in the case of REITs, again to the underlying properties themselves.

One fund that stands out is the Elite Rated F&C Real Estate Securities. It offers access to both the UK and major European listed property markets. It is slightly unusual in that it both buys shares in companies it believes will do well and takes short positions against companies it thinks are not going to do so well. Taking a short position is one way fund managers seek to deliver returns for their investors in both up and down markets.

Geographic diversity

Given the uncertainty around the outlook for property if Brexit does go ahead (as well as aforementioned concerns around a heated residential market) some international property market exposure seems sensible.

You could buy a house in Spain. But if you’re not planning your imminent retirement it’s probably not immediately useful, plus investing a lump sum in a single country hardly counts as a diversified portfolio.

Another fund offering geographic diversity across the continent is the Elite Rated Premier Pan European Property Share, which provides access to Europe’s strongest markets in Germany, France, Sweden and Switzerland.

Of course, you can also find property funds with a more global focus or an Asia Pacific focus, for example, depending on your interest – although we don’t currently have any Elite Rated funds investing in these areas.

None of these options are without risk, nor are they an exact substitute for buy-to-let investing, but for investors that may not have the capital (or the inclination) to commit to a mortgage in the current environment, they are definitely worth considering.

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.