Expand your real estate portfolio with a property securities fund

Bricks & mortar funds can miss out on residential developments and other growing sectors driven by demographic trends, says Fidelity International.

Retail investors who want to tap into some of the most exciting demographic trends influencing real estate developments need to look beyond open-ended bricks and mortar funds which are largely confined to just three sectors: offices, retail and industrial, according to Fidelity International.

Analysis of popular retail direct property funds shows that they invest the majority of their portfolios in those three sectors. For investors wanting access to a wider range of real estate opportunities, property securities funds offer a far more varied investment universe, ranging from residential developments to hotels.

The research shows that offices, retail and industrial holdings represent more than 90% of the entire portfolio of 4 out of 7 bricks and mortar funds generally marketed to UK investors. The remainder of the portfolio tends to be invested in equities, cash and “other”. In comparison, the Global Real Estate Total Return Index, the benchmark used by the global property securities funds available to UK investors, has just over 56% in these sectors. The rest of the index is invested in Residential REITs (13.7), Hotels (3.6%) and Diversified REITs (26.4%) which, as the name suggests, invest in a number of market sectors and offer investors opportunities in areas such as property development, storage companies and healthcare.

Having a greater reach into sectors which include large residential developments, social housing projects, care homes, hotels and healthcare properties, means that property securities funds can better tap in to key demographic trends which are likely to increase in years to come. For example, the cost of housing is rising faster than wages, and longer lives will mean not only more time in retirement but unfortunately also more time in poor health.

The Global Real Estate Total Return Index includes companies such as Chartwell REIT from Canada, which specialises in retirement residences and long-term care homes, and Health Care Property Investors from the US, the nation’s largest publicly traded REIT focused exclusively on the healthcare industry, which owns hospitals, nursing facilities and senior housing properties among its portfolio. The index also covers properties such as the glamorous Hilton Hotel Corp which owns more than 2,800 hotels worldwide, including the Waldorf-Astoria in New York.

However, in spite of these diversification benefits and the fact that property securities funds made almost twice as much money for investors in 2006 as their bricks and mortar counter parts, many UK investors instead opted for bricks and mortar funds. Estimated net sales over 2006 for the two are remarkably different, with inflows into bricks and mortar funds (£3.5bn) outpacing inflows into property security funds (£486m) by a long way.

Ironically, bricks and mortar funds are less capable of investing money very quickly, as lead times for buying a building can be weeks or even months. In contrast, money can be invested within days or even hours in securities, meaning that the property securities funds can cope much better with rapid inflows from customers. If a bricks and mortar fund has no controls on inflows of money from investors, it can rapidly build up cash holdings, diluting returns for investors.

Richard Wastcoat, UK Managing Director, Fidelity International said “There is no doubt that direct property funds have seen strong inflows of money from investors, which can present a major challenge for open-ended funds. Funds that invest in property securities, however, can reach much further into the property market for investment opportunities, offer superior liquidity and, importantly, are better placed to take advantage of key worldwide trends and offer a truly diversified portfolio to investors.”