Although many direct property or "bricks and mortar" funds offer little in the way of capital growth, many advisers and wealth managers are using them as an alternative to gilts.
The funds are also used by a number of multi-asset managers to diversify their risk.
"The reason why we are looking at property funds again is because of their income levels and because they lack correlation to other asset classes such as equities and bonds," said Ben Willis, head of research at Whitechurch.
On top of that, because these yields come from leases, there is often a degree of inflation protection – something not offered by fixed income.
With this in mind, FE Trustnet looks at three property funds that offer different types of exposure to the asset class for investors who either want to diversify their portfolio or want a viable alternative to bonds.
Henderson UK Property
One of the most popular funds in the IMA Property sector is the £1.1bn Henderson UK Property portfolio.
Willis says he and his colleagues use it in their cautious portfolios as it pays a high yield, which is currently 4.2 per cent, making it a good replacement for their government bond exposure.
He also likes the fact it is an established portfolio and that its managers Marcus Langlands Pearse and Ainslie McLennan are an experienced team. He says this is important because “size matters” when it comes to property funds.
The duo have managed the Henderson UK Property fund together since May 2009, over which time it has made 39.32 per cent. Those returns have been higher than those available from gilts and had a low correlation to the UK equity and bond markets, as the graph shows.
Performance of fund vs indices since May 2009
Source: FE Analytics
The fund invests directly in property, including offices and retail and industrial buildings, primarily located in London and the South East. It also has a small amount of exposure to property shares such as British Land.
Henderson UK Property has a high 22 per cent cash weighting, suggesting it is prepared for the eventuality of redemptions.
It has an ongoing charges figure (OCF) of 1.84 per cent and requires a minimum investment of £1,000.
HSBC Open Global Property
Another option for investors could be the HSBC Open Global Property fund, which is run by the only FE Alpha Manager in the IMA Property sector, Dr Guy Morrell.
This portfolio differs from most others in the sector as it is a fund of funds. It invests across the world and holds funds that invest in property shares and directly in property.
Charles Younes, analyst at FE Research, says HSBC Open Global Property’s blended approach is the main reason why it features on the team’s coveted FE Select 100 list.
"We like the fund’s approach as, in keeping with HSBC’s global philosophy, it offers exposure to property markets across the world, not just in the UK," Younes said.
"Furthermore, its preference for investments that are easy to sell means it can react quicker to changing conditions. The fund’s focus on finding the right local expertise makes the global approach more manageable and gives it access to experts in every region."
"The main driver of the fund’s performance, however, remains the team’s capacity to define the right investment themes at the right time. It has performed well so far and its process gives it a good chance to do just as well in the future," he added.
The £61m HSBC Open Global Property fund was launched in November 2007. Over that time, it is a top-quartile performer in the IMA Property sector, with returns of 27.7 per cent.
Performance of fund vs sector since Nov 2007
Source: FE Analytics
Morrell holds 58.6 per cent of his fund in property shares and a further 36.6 per cent in direct property. His largest regional exposure is to the UK – which makes up 50 per cent. He also has 28 per cent in North America and 17 per cent in the Asia Pacific, though that is mainly made up by his position in the Schroder ISF Asia Pacific Property Securities fund.
HSBC Global Open Property has a yield of 2.37 per cent, an OCF of 1.59 per cent and requires a minimum investment of £1,000.
Hearthstone UK Residential Property
While the majority of open-ended funds in the property sector invest in the commercial side of the asset class, investors can gain access to the residential market via the Hearthstone UK Residential Property fund.
The fund – which is managed by David Gibbins – invests across the UK residential market, with assets located across England, Scotland and Wales. The fund invests in London, though due to the rising prices, Gibbins says he cannot hold too much in central London because of concentration risk.
The portfolio holds flats and terraced, semi-detached and detached properties.
Since its launch in July 2012, the fund has returned 3.85 per cent.
Performance of fund since July 2012
Source: FE Analytics
The fund doesn’t have a set yield, though the manager says it should be viewed as a total return portfolio instead of an income-producing one.
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, says it isn’t a fund he has come across before but in principle it is a strategy he likes. However, he says investors should dig a little deeper before they make their own decision.
"I think it would appeal to a lot of people," he said.
"My only worry, like with commercial property funds, is liquidity. It may have a lot more holdings than a commercial property fund – which will help – but if it were to face significant redemptions, liquidity could become an issue."
"It is also the case if it were to see inflows and they have nowhere to deploy that cash, as property acquisitions can take a long time, which means that cash could pile up," Morgan added.
Gibbins says that although his fund is priced daily and investors are by no-means locked into it, liquidity is one of the areas he and his team are trying to tackle.
"We look very closely at liquidity and because of that we keep 15 per cent in cash or near cash assets," he said. "Also, before we even buy a property, we grade them for their potential liquidity, which is very important."
Gibbins also points out that liquidity is often better in the residential market, because if he were to face redemptions, he wouldn’t have to offload a multi-million pound office space or shopping centre.
Hearthstone Residential Property requires a minimum investment of £1,000. Its OCF hasn’t been calculated yet.