How to develop a property portfolio

Property investment has been particularly attractive to Irish investors for a very long time. There are undoubtedly historical and emotional reasons for this, but the returns aren’t to be sniffed at either.

“As an asset class, core European real estate as measured by the IPD Pan European All Property Index from 2012-2016 has returns over 7 per cent annualised,” says Mary Cahill, head of global investment selection with Davy. “Of those returns, over 5 per cent of the 7 per cent relates to income.”

She also points out that property is very attractive for diversification purposes. “Real estate behaves very differently to traditional markets and so it provides very good diversification benefits to a multi-asset portfolio, thereby improving your overall risk-adjusted returns,” she says.

Most people simply can’t afford to buy office blocks and apartment buildings to balance their investment portfolios, however. But there are alternatives to the real thing.

“One alternative solution to investing in physical real estate is investing in publicly listed real estate companies,” says John Crowe, chief executive of Kestrel Capital. “These are commonly known as Real Estate Investment Trusts, or REITs. A REIT is a company that owns and, in most cases, operates income-producing real estate such as office buildings, apartments, shopping centres and hotels. By owning a share in a REIT, you as an investor can participate in the upside and downside of the property portfolio of one of these REITs.”

Key benefits

One of the key benefits of REITs is that they offer greater liquidity than physical property, Crowe adds. “REITs trade on a daily basis on stock exchanges across the globe. This means that as investors’ circumstances change or their view on the asset class changes, they have an ability to be nimble and use this daily liquidity as a means to gain access or move out of the asset class.”

Their diversification benefit is limited, however, according to Cahill. “Because they are listed, REITs provide more equity-like exposure in portfolios than property in the short and medium term. This is because they price on a premium or discount to the actual value of the underlying properties depending on investor sentiment and demand. It can also be difficult to get a diversified exposure to the asset class as REITs tend to be sector, retail, office or logistic-centric as well as country specific.”

Cahill points to other alternative solutions including exchange traded funds (ETFs) that invest in REITs, unlisted real estate property funds, opportunistic real estate funds, and investing in a fund where you can gain exposure to a diversified portfolio of real estate debt.

“There are advantages and disadvantages to all methods of investing,” Cahill adds. “However, the benefit of real estate in a multi-asset portfolio is that it has a low correlation to traditional equity and fixed income markets. Therefore, to benefit from this, and if you are a long-term investor in the asset class, looking at an unlisted fund with a diversified portfolio of assets and a good track record and management team is the most attractive means of gaining access to the asset class.”