Property has become increasingly popular as investors have recognised the diversification benefits it can add to a portfolio. In other words – performance can help smooth out peaks and troughs in a portfolio, reducing overall risk.
Generally, when the economy is doing well property performs well. When we are earning more money and feeling reasonably secure, we not only buy larger houses but also spend more on retail goods, encouraging companies to invest in larger premises. However, one of property’s key problems is its lack of liquidity – it is difficult to sell or buy a property investment quickly. It takes time to draw up legal contracts and undertake all the checks and balances involved in the sale or purchase of a property, not to mention the costs involved in moving.
Although it behaves differently to shares or bonds, an investment in property offers income from rents that are similar to the interest payments generated by bonds. It can also offer the potential for increases in this rental income as well as the possibility of some capital growth. There are, however, significant differences between commercial property and residential ‘buy-to-let’ investments. For example, leases on commercial property are longer – meaning greater stability of income – and the vetting of tenants is generally more detailed, reducing the likelihood of rental default.
The global commercial property market has become more transparent, as companies make more information available (either voluntarily or through corporate governance). Moves to improve the regulatory aspects of the industry should also be positive for investors. In particular, the UK has proved attractive to foreign investors, due to its central position between New York and Asia, and its reputation as one of the centres of the financial world.
For the average investor, buying property over and above their own home is often beyond their means. However, there are numerous diversified investment funds that focus on the sector. These offer investors the opportunity to gain exposure to a selection of properties, providing access to a key asset class while removing the risks associated with direct investment in a single building. It is also worth remembering investors can use their annual ISA allowance to invest in relevant funds, ensuring their capital gains and dividend income will be tax-free.
All our clients at Platinum are encouraged to diversify their portfolio and most have holdings in all sectors, including property. If you are unsure about whether you have an exposure to property please do not hesitate to get in touch with us.