Six ways to invest in an inflationary environment
UK inflation rose to 9% in April, its highest level in 40 years and almost double the rate the Bank...
Discussing house prices is a hugely popular pastime in the UK. It’s right up there with the weather when it comes to conversation starters.
It’s also a topic that’s guaranteed to divide opinion. Ask 20 people their views and you’ll have as many predicting valuations are set to rocket as warning a slump is on the way.
The same can be said for property market data. Surveys and statistics are churned out every month, but they can provide contrasting views and opinions.
So, what is the reality? Here we take a look at the various ways that you can invest in the asset class and the potential risks you need to consider.
Property appears to be a simple asset class but it’s actually relatively complicated. There are many ways to get exposure – and the risks and rewards will vary.
The potential benefits of each approach will also differ. For example, owning an actual building may provide a different type of return than other assets you own. This can help diversify your overall portfolio – especially if it largely consists of company shares and is subject to stock market volatility.
Therefore, deciding whether property is right for you will depend on your existing holdings, the available budget, your longer-term investment objectives, and overall attitude to risk.
Your investment time horizon is also important. For example, can you afford to wait 30 years for the value of a particular property to rise or do you need to earn a regular income?
Let’s now take a look at the different types of property. We have initially split this into direct property and property securities.
By direct property we mean buying buildings. The most obvious starting point is residential property as it’s the area with which most people are familiar. At its most straightforward, this could be the house in which you live. You buy it in the hope that it will rise in value over the coming years.
According to the latest HM Land Registry data, valuations increased 10.6% over the year, meaning the average UK house cost £264,000 in August 2021 – £25,000 higher than the same point in 2020*.
Then there is the residential buy-to-let market. The idea is you purchase houses or flats and rent them out to people. Ideally, you’ll earn a rental income as well as enjoying valuation increases.
Buying commercial property is the next option. Depending on your budget, this can be a shop, workshop, warehouse – or even an entire shopping centre – that’s leased to a business.
You’ll need to consider the various taxes and expenses that are associated with buying actual buildings, not to mention the ongoing maintenance costs.
The price of properties, as well as the rent that can be charged if this applies, is heavily dependent on the demand for such sites. That’s why location is crucial, as well as the economic backdrop. Obviously, Covid-19 has thrown a spanner in the works over the past 18 months with the increasing need to work from home causing companies to question whether they even need an office.
However, capital values increased 1.6% across all UK commercial property in September 2021, according to the latest monthly index of property advisor CBRE**. “This is the highest All Property capital growth figure since June 2014,” it states.
An alternative to buying actual bricks and mortar is investing in the shares of companies that are involved in this area. For example, there are real estate companies developing properties, builders’ merchants, online estate agents, and numerous home improvement businesses.
You can opt to buy shares in individual companies. However, it’s worth bearing in mind that you’ll be concentrating your risk on a handful of names. Share prices can be extremely volatile and the value of your investment can move dramatically on announcements from the company as well as external factors such as interest rates.
Of course, not everyone has the budget to buy actual bricks and mortar. The good news is they can still get exposure to property via specialist funds that have millions of pounds at their disposal.
This is where investment funds have a particular role to play. An example is the Janus Henderson UK Property fund, which is run by Ainslie McLennan and Marcus Langlands Pearse. This portfolio provides core exposure to the UK commercial property market, while retaining a significant allocation to cash for liquidity purposes.
According to the most recent fund fact sheet, the portfolio’s cash weighting is 15.7%***. The remaining 84.3% is invested in physical property – and biased towards sites in the South East of England.
Then there is the Time: Commercial Long Income fund that aims to provide a stable return by primarily acquiring commercial freehold ground rents and properties.
The top 10 holdings of the portfolio, which is run by Nigel Ashfield and Roger Skeldon, include DHL in Manton Wood, Morrisons in Birtley, the Holiday Inn at Southend, and Asda in Gillingham***.
It’s also worth noting that not all property funds will buy actual buildings. There are portfolios that buy into a wide variety of property-related securities.
The BMO European Real Estate Securities fund, managed by Marcus Phayre-Mudge and Alban Lhonneur, provides access to a portfolio of securities listed in both the UK and Europe.
Its top 10 holdings include Vonovia, a German residential real estate company; Segro, a British property investment and development firm; and Safestore, the self-storage provider***.
There are even a few portfolios that give you exposure to both direct property and securities. One such example is the TR Property Investment Trust, also managed by Marcus Phayre-Mudge.
This trust invests in the shares of property companies of all sizes, typically within Europe and the UK. It also has a small amount invested in physical property in the UK.
*Source: Office for National Statistics, UK House Price Index: August 2021
**Source: CBRE, Q3 2021 report, 11 October 2021
***Source: fund factsheet, 31 August 2021