Investing in indirect property, though, is not always seen as the first port of call when looking for real estate exposure. This is despite the existence of a mature and well established indirect property market which also offers tax benefits. The Continent in particular has a very tax efficient market in the form of Dutch FBIs and French SIICs to name a couple.
The UK and Germany are the latest countries to have established tax efficiencies in the form of UK REITs and G-REITs respectively. With the sector having risen 9.2 per cent over the past 12 months compared to a fall of -0.9 per cent for the wider equity market, perhaps this is a good time to take a fresh look at what listed property has to offer .
Firstly, listed property has an attractive distribution yield, thanks to the income generated from the underlying properties. Rents are secured by leases, which provide a stable income and good visibility of future earnings. Property companies typically provide better income payouts than the wider equity market, while those with a REIT-like structure can be obliged to pay out up to 100 per cent of net earnings.
Over the last ten years, for example, European real estate securities have had an average dividend yield of 4.8 per cent, in comparison to 2.7 per cent from European equities as a whole. And even when compared with direct property, the dividend yield from European indirect property is still very favourable. During 2009, for example, the SWIP European Real Estate fund had a distribution yield of 4.7 per cent, in comparison to 2.9% from the IMA Property Sector average.
Even within a small fund, real estate securities can provide diversification benefits, thereby reducing portfolio risk. As investors are buying shares in property companies, rather than properties themselves, they have access to a wider range of property managers, buildings, sectors, countries and niche markets. This creates diversity in the portfolio and helps to smooth out long-term returns.
Investing in indirect property is also a nimble way of moving into the market. Property shares are liquid investments, meaning they are easily and quickly traded. There are also no barriers to entry, such as high capital and transaction costs. It can often take years to build up the right contacts to buy a property, but there are no such restrictions with the listed market. This makes it very attractive to individual investors who are often unwilling, and unable, to take on the risk and the cost of investing in an actual property.
Real estate shares are sometimes criticised for being more volatile than direct property, which has made people wary of investing in this asset class. Our own research has shown, however, that while listed property is closely correlated with equities over the short-term – mainly because it feels the influence of daily sentiment from the general equity market – over the long term, it is more closely correlated with the direct property market. Conversely, direct property actually has a higher correlation with general equities than listed property, over a holding period of 12 months or more.
Ultimately the long-term value of any property share is driven by the long-term cashflow of the underlying asset. Whether investors own an office or invest in a property company that owns offices, the value of those assets will be determined by the same environment and the fundamentals of the underlying property market.
The UK and European listed property markets have seen a substantial rebound over the last year on the back of an improving economy and some capital growth in the property market. There is still scope, though, for this to run further. We continue to see opportunities in both the UK and the Continent, although these opportunities vary significantly between regions and cities.
The UK market has lagged Europe in recent months and we expect a greater bounce back from the UK in the future given its stronger rental recovery projections. At the sector level, central London offices offer the greatest potential for growth in the short-term. However, there are a number of compelling asset management stories on the Continent in both the retail and residential sector that are set to deliver attractive earnings growth over 2011.
We believe this is a great time to get ahead of the game and to make the most of what listed property has to offer.
Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions. Past performance is not a guide to the future.
Vicky Watson is investment director of European equities and fund manager of the SWIP European Real Estate Fund. The views expressed here are her own.