Most investors know that property is a key component of any sensible investment portfolio. UK property has been an effective and robust way to store value, generate income and protect against inflation due to long term factors that keep demand high and constrain supply. These include population growth, limited land for building and tight planning regulations. It’s also allied to a robust and well-organised legal system, which has developed over hundreds of years.

In this series, we’re exploring the four ways you can gain exposure to the UK property market. We’ll weigh up and pros and cons of each type of property investment, so you can make an informed decision as to how you can incorporate this asset class into your investment portfolio

Invest in property trusts or funds

With trusts and funds, you invest in the shares of companies who develop or invest in property themselves, or pool money with other investors via a property investment fund. An advantage of investing in listed companies or funds like these is that you can generally invest within your SIPP or ISA, therefore deferring or shielding tax. Comprised within this approach are three main subsectors.

Investing in property companies

Generally-speaking, the share prices of property companies should be correlated to the returns from investing in property, since that is their main business. Using a stockbroker or an online investment platform, you can purchase shares in companies involved in UK or overseas property activities. Examples include housebuilders like Persimmon or Countryside Properties. Companies may pay a dividend on profits that they make, or may decide to keep and reinvest profits, reducing dividends in favour of longer term growth.

The advantage of investing in property companies is that you are accessing (you hope) considerable professional expertise. After all, that is what these management teams do for a living.

There is also good liquidity, meaning it’s easy to buy and sell the shares, since the companies are traded on the London Stock Exchange. Although investing is for the long-term and you should never invest money that you might need urgently, if you do decide you’d like to sell your assets, and you need to do so quickly, it’s generally easy to find a buyer for your shares.

The disadvantage of investing in property companies is that returns are paid to investors after all the costs of running a public company, paying expensive management teams, advisors etc have been taken care of. A key issue to consider is that, to a large extent, you are investing in the strategy and competence of the management team of that company just as much as the asset class that they work with.

In addition, it is often difficult to understand the underlying assets these companies are investing in, since public companies tend to be careful about how much information is shared with the general public.

Investing in property trusts or Real Estate Investment Trusts (REITs)

A property trust is a company that issues investors with a fixed number of shares in exchange for money, which it invests in properties. This is often referred to as a closed-ended fund. The company follows a published investment strategy when investing your money, and the shares are tradable on a recognised stock market (for example the London Stock Exchange). The share price is determined by supply and demand, and may diverge quite substantially from the net asset value of the underlying properties.

The closed-ended structure enables the investment manager to introduce gearing, to magnify returns to trust shareholders and to take a longer term view on assets acquired, safe in the knowledge that shareholders can’t redeem their investment as in a fund.

Since legislation was introduced in 2007, most property investment trusts have elected to be classified as Real Estate Investment Trusts or REITs. REITs do not have to pay corporation tax on property income as long as they pay 90% of income over to investors as dividends (while also meeting a host of other qualifying criteria).

An example would be British Land plc, which develops retail and office properties, Derwent London, who specialise in London office properties, or Assura plc, who develop health care centres and GP surgeries. It’s possible to invest in these companies via an online stockbroker. With REITS, you are investing in the company shares and, like any share, they respond to investors sentiment about the future prospects of the company.

REITs listed on the London Stock Exchange are typically liquid – meaning you can buy and sell shares very quickly. However, beware that the share price may not always reflect the underlying property assets. For instance, shares of several REITs involved in retail or London property are currently trading at 20-40% discount to the net asset value of their underlying property portfolio, representing potentially good value for buyers but potentially less good value for anyone looking to sell.

Moreover, being essentially company shares, REITs are subject to stock market volatility. And it’s not always clear what you are actually investing in, as REITs can be opaque.

REITs must comply with stock exchange rules, and are therefore expensive to run. As closed companies, they need to issue shares to raise more money to grow. Share issues of public companies require a prospectus to also be issued which can be time consuming and costly. Funds raised may sit on the company balance sheet for some time before being put to work which gives rise to cash drag, potentially reducing returns to existing shareholders.

Investing in property investment funds

Like property trusts, property investment funds raise money from investors which is invested in property according to a specified strategy. Unlike a property trust, a property investment fund accepts money from investors at any time in exchange for issuing “units” to investors. This is often referred to as an open-ended fund since the fund is “open” to new investors at any time.

The units do not trade on a stock exchange like closed-ended trust shares, and the value of the units is set periodically by the fund with reference to the net asset value of the underlying properties. This can be an advantage, when compared with a trust, as the price is not subject to supply and demand variability.

Investors can redeem units for cash at the net asset value and the notice period for redeeming the units will be specified by each particular fund. Depending on the size of the fund, redemption times can vary from one day to three months or more, which can deter some investors. Since property is generally illiquid, property funds that invest directly in properties must keep some cash in reserve to satisfy redemption calls.

Some funds, such as the Janus Henderson UK Property PAIF, are structured as a Property Authorised Investment Fund (PAIF) which essentially gives it the same tax advantages as the REIT. However, one of the disadvantages of being structured as a fund is that it cannot use gearing to amplify returns.

Some property funds don’t invest directly in properties, but instead invest in quoted shares of property-related companies, for example Aberdeen Property Share Fund, which invests in REITs and property companies. It produces a return from a combination of the returns provided by the underlying companies.

Funds can be acquired via your stockbroker or IFA, just like shares.

Perhaps the most well-known way to invest in property is buy-to-let: you own a property outright and become a landlord, collecting rent from your tenants. You manage the property to ensure that your yearly takings exceed the cost of owning the property, earning you a profit.