Buying into bricks and mortar funds is “very dangerous” way for retail investors to gain exposure to property, according to Gillian Tiltman (pictured). 
Though the sector has witnessed small outflows over recent months, direct commercial property funds has become hugely popular with retail investors over recent years thanks to their yield credentials, strong returns and low correlation to equities.
At the same time, many investors believe that REITs and funds that buy into property securities are less attractive than bricks and mortar funds as they have historically been more volatile.
However, Tiltman – who co-runs the Neuberger Global Real Estate fund alongside Brian Jones, Steve S. Shigekawa and Naton Kwang – says that this concept has been created by the higher level of volatility displayed within property securities compared to physical property, which she points out occurs because both assets are priced very differently.
While securities are traded daily, physical property isn’t, which she says means that the IA Property sector isn’t an accurate or honest representation of the market area.
Performance of indices over 5yrs
Source: FE Analytics
“Direct property funds are very dangerous. They’re not for retail investors, they’re for pension funds,” the manager warned.
“I just don’t understand why retail investors wouldn’t choose to invest in a REIT where it’s bricks and mortar with liquidity, you can get your money in and out, you’re participating in dislocations in a stock market so you can create value, your funds will never be gated, and you’re buying companies that have a distinct a scale advantage over these retail property funds, which simply don’t.”
One reason that investors may opt to go for physical property rather than securities is for greater diversification benefits, as property securities are likely to be more correlated with equities.
Another reason that investors might choose to buy into a direct property fund is that they are cheaper, with some trusts in the various IT Property sectors trading on premiums of up to 39 per cent.
In an article published earlier this year, FE Trustnet spoke to a selection of investment professionals, including Informed Choice’s Martin Bamford and Chase de Vere’s Patrick Connolly, who both said they hold bricks and mortar funds for clients as part of a diversified portfolio.
“Property investments of this type can provide consistent returns and strong diversification benefits when held alongside other asset classes such as equities and fixed interest,” Connolly said.
“Our clients will typically have been 5 per cent and 15 per cent of their portfolios invested in commercial property. From our perspective we hold property to provide consistent returns or income and for diversification benefits, which is why we use ‘bricks and mortar’ investment funds.”
In contrast, Hargreaves Hale’s Neil Jones prefers REITs to direct property funds as, during times of stress, he says there is no requirement to be a forced seller of the underlying assets.
Currently though, he says the firm has fairly limited exposure to the sector in general.
“There has been a bit of a sell-off more recently, in part due to investors from oil rich nations repatriating assets,” the investment manager said.
“I would expect this situation to continue and indeed it could be made worse if there is a Brexit vote to leave.”
“However, there are some good REITs out there and there are opportunities to pick these up at discounts to NAVs, so I would suggest this is a more effective way to gain exposure to the sector.”
Tiltman says that the biggest benefit that REITs hold is that they are actually safer for investors – while some believe that holding a fund that buys into physical property makes them feel more secure, the manager says that holding shares still involves buying land securities but with greater liquidity.
“I understand why a retail investors wouldn’t want to go out and buy a few stocks for their ISAs if they don’t understand them, but that’s where a property securities fund comes in because we do understand how this works. It’s the perfect fund for retail investors and that’s something I have spent my whole career trying to tell IFAs. They’re very vanilla, very straight-forward,” she said.
“If I finish my career in 25 years or so, one thing that I hope comes out of it is that investors understand that REITs are very stable and benign.”
“The very heart of it is that they’re companies that own property. They don’t pay corporation tax because they pay out 90 per cent of their taxable income as dividends. It just that simple.”
Neuberger Global Real Estate fund invests in REITs across a wide range of property sectors including retail, industrial, office and residential areas of the market to generate both growth and a rising stream of income for the investor.
She has managed global property funds for more than 11 years in both the US and the UK and has noticed that UK retail investors are a lot more apprehensive when it comes to buying into REITs. She says that this could be attributed to the reputation that the investment vehicles had before legislation reforms in the UK in 2007.
“Typically REITs [in the UK] were very much the type of company that would try to play a real estate cycle though, which is meant to mean they sell at the top and buy at the bottom, whereas what really happens most of the time is they buy at the top and sell at the bottom,” she said.
“The government thought it was a good idea to implement the REIT legislation in 2007. Intellectually it was a good idea, especially seeing how obsessed UK investors are with property, as it enables retail investors to access this type of structure. But, it didn’t work.”
The manager says that, because 2007 was at the top end of the last real estate cycle, valuations were toppy. She points out that this, combined with relatively unknown legislation that requires strict capital discipline, meant that REITs struggled and were hit particularly hard during the financial crisis.
“There were several amalgamations to create the perfect storm. In this case, it was the top of the market so asset values started rolling over. Why is that such a bad thing? These companies didn’t necessarily know how to be REITs,” she continued.
“If you have to pay out 90 per cent of your taxable income as dividend, you have to be very disciplined with your capital. These companies were used to just riding a cycle and not to having that tremendous discipline.”
Tiltman says she was shocked at how apprehensive many UK-based managers were when it came to buying into REITs after moving to the UK several years ago, although now she says this no longer has to be the case. In fact she says that the most dangerous way to gain exposure to the property market is through direct property investment vehicles, which she says appear to be popular among retail investors.
Neuberger Global Real Estate has outperformed its benchmark since January,which is as far back as our data stretches, providing a total return of 13.22 per cent and beating the FTSE EPRA/NAREIT Global index by 3.55 percentage points. The fund was launched in December 2014.
Performance of fund vs benchmark since launch
Source: FE Analytics
