Five offbeat ways to invest in property

Billions have flown into commercial property funds
this year, but investors may be missing a trick by not
looking further afield. We look at five alternative
property funds
Commercial property funds have been flying off the
shelves in recent years and investors have reaped the
rewards, with double-digit returns in 2013 and 2014 .
Similar returns are expected this year .
The funds, which buy offices, shopping centres and
warehouses, have benefited from rising capital
values and strong demand from tenants.
But some experts have cautioned that the easy
money has now been made and investors should
consider looking further afield.
The consensus, however, is that commercial property
is not a bubble waiting to pop. Instead the outlook
remains promising, but returns are expected to cool
from here.
Gary Potter, who runs “funds of funds” for F&C
Investments, pointed out that yields on commercial
property funds had fallen naturally following the
sector’s strong performance and were now arguably
too low for some income-hungry investors.
“Investors continue to buy, but what are they getting?
Yields of 3pc, perhaps 4pc at best,” he said. “I am
cautious when an investment becomes fashionable,
which often happens towards the latter stages of a
cycle. This certainly applies to commercial property
funds.”
For investors who want income of around 4pc Mr
Potter said the UK stock market, with the FTSE 100
currently yielding 3.9pc, should be the first port of
call.
For those who want potentially higher returns, and
are prepared to stomach more risk, there are a
number of property funds that specialise in areas off
the beaten track and produce higher yields. Here we
name five offbeat ways to invest in property.
Student accommodation
First on our list is GCP Student Living, a real estate
investment trust that owns a portfolio of student
accommodation properties in and around London.
The shares listed in May 2013 at £1 and were trading
this week just below £1.40.
Mr Potter owns a small position after being attracted
by the “strong management team that knows what it
is doing”.
The fact that more and more overseas students are
coming to Britain to study is viewed as a positive,
stimulating demand. GCP Student Living said there
was a shortfall of around 170,000 university beds in
2014.
The fund targets a total return of 8pc‑10pc a year.
The yield is currently 4.2pc.
Charges are high at 4.1pc a year. The trust’s shares
are also trading at a 5.3pc premium to the value of its
assets.
The other real estate investment trust that specialises
in student property is Empiric Student Property. This
trust favours city-centre locations and owns around
30 properties.
The charge is again high, at 3.9pc. The premium is
also pricey at 8pc. The yield, however, is more
attractive, at 5.4pc, thanks to the trust being less
focused on London.
Doctors’ surgeries
A small number of investment trusts invest solely in
“primary healthcare infrastructure”, principally
properties let to GP practices and other parts of the
NHS.
One of these trusts is MedicX, which yields 7pc. But
the premium is enormous, at 39pc.
Analysts like the fact that the trust’s assets, if not its
own shares, should perform independently of the
stock market.
Alan Brierley of Canaccord Genuity, the stockbroker,
rates MedicX a “buy” . “It holds very long-term
contracts with the Government for these facilities,”
he said.
Other trusts that specialise in this niche area include
Primary Health Properties and Assura.
German property
Germany is a nation of tenants, who historically have
not shared our obsession with home ownership.
But its property market is booming, with wealthy
international investors piling in. Berlin, in particular,
is fast becoming a property hotspot.
A trust set up in 2006 to buy property in Berlin is
directly positioned to profit. Taliesin Property, listed
on London’s junior Aim stock market, buys
residential and commercial properties. The majority
are tenanted flats.
Many of its properties were bought at knock-down
prices, well before property values started to rise a
couple of years ago.
According to Nick Greenwood, who manages the
Miton Worldwide Growth investment trust, which has
5.2pc of its money in Talesin, the value of certain
properties in the portfolio has doubled.
He said rents were also being driven up, despite tight
legal controls.
“Taliesin refurbishes properties; in turn this allows
rents to be increased and gets around the rent
controls. Properties are either leased out at a higher
price or the existing tenants have to pay more,” Mr
Greenwood said.
“But the big attraction is that capital values are rising.
Berlin has moved from urban wilderness to a major
European capital within a generation and is now
viewed as a trendy place to live.
“As more and more young professionals move to
Berlin I think there will be change in attitude to
owning a property. Those under the age of 40, who
will have seen property values rise elsewhere, such
as in London, will increasingly buy instead of being
happy to rent forever.”
The fund reinvests all of its income. It has a high
annual charge of 5.5pc and the shares trade at a
huge premium of 37pc. It also has “zero-dividend
preference shares” that mature in September 2018.
Care homes
Another fund that has defensive characteristics and
benefits from favourable demographic trends is
Target Healthcare, a real estate investment trust that
invests in purpose-built care homes.
It takes out long leaseholds, 29 years on average, in
areas where there is a imbalance between demand
and supply. It currently has 31 homes on its books.
Innes Urquhart of Winterflood, the stockbroker, said:
“The biggest risk, as with other property investments,
is that the tenant defaults. But the trust has grown its
assets from £46m at launch in March 2013 to £140m
today, so it has become much more diversified.”
The annual charge is 1.36pc, while the premium
stands at 10pc.
Freeholds
Targeting annual returns of 5pc is the Freehold
Income Authorised fund.
The fund buys property freeholds, mainly from
property developers. It then pockets the ground rent
paid annually by leaseholders.
The portfolio owns more than 64,900 freeholds, 80pc
of which have some link to inflation.
Time Investments, the fund manager, said it had an
unbroken 22-year track record of positive inflation-
beating returns since launch in 1993.
Over the past year, to the end of September, total
returns stood at 11pc. It yields 2.4pc, according to
Bestinvest, the broker.
It can be purchased only through financial advisers
and costs 1.64pc a year.