How to Invest in Property Without Buying a House
To many people, investing in property may seem like a nice idea. But with the average house price in the UK currently more than £250,000 - buying an investment property is simply not feasible for most people.
But what if we were to tell you that you could invest in property without buying a house? That’s right, there are in fact several ways in which you can invest in the property sector without buying anything made of bricks and mortar. In this article, we will outline a few of these methods, look at why people invest in property in the first place and explain how you can start investing in property with Admirals.
Table of Contents
Why Invest in Property?
Whilst investors may have differing opinions about a lot of things, one thing that every successful investor will tell you is the importance of diversification.
As the saying goes: “don’t put all your eggs in one basket” and the same is true for investment. Holding a variety of different assets greatly reduces your risk by lessening your reliance on the performance of a particular asset or market. Therefore, a potential setback in one market will not endanger all your investments and is hopefully compensated for elsewhere.
The property market, in particular, tends to perform differently to other major asset classes, making it a good candidate for diversifying your portfolio.
Another important reason to invest in property is that, historically, it has proven to be a good hedge against inflation. When inflation goes up the value of many financial instruments, including cash, most bonds and some shares, will tend to move down - or not keep up with inflation. By contrast, property values have historically performed well in times of inflation.
How to Invest in Property Without Buying a House
We said earlier that there were several methods available for investing in property which did not involve buying a house, so what are these exactly?
|Real Estate Investment Trusts (REITs)|
|Exchange-Traded Funds (ETFs)|
You have most likely heard of some of these, but perhaps you did not consider that these types of investment could be used to specifically target the property market.
All of the options above allow investors who are feeling bullish on the property sector to attempt to profit from it, without buying a house. In the following sections, we will look at each of these in detail and help you decide which may be best for you.
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We will start with the most familiar instrument on our list, which needs little introduction: stocks.
For those wanting to invest in property, stocks offer an opportunity to invest directly in companies which operate in the industry. Housebuilding companies are one example, who, for obvious reasons, have a lot to gain from a strong property market.
Below we can see the long term weekly chart of Persimmon, a British housebuilding company. Since 2009, the share price has mostly been on an upward trend and, despite falling steeply during the outbreak of the Covid-19 pandemic, has since almost recovered its pre-pandemic price level.
Using a pool of investor money, Real Estate Investment Trusts (REITs) acquire or develop, and usually manage, various income generating properties, such as apartment buildings, offices, shopping centres and hotels. REITs allow their investors to enjoy some of the benefits associated with income-producing properties without actually buying or managing the properties themselves.
REITs are listed on stock exchanges where their shares are bought and sold, exactly like those of any public company. In fact, despite having the word “trust” in its name, a REIT is actually a company, but a company which enjoys special tax treatment.
Companies which qualify for REIT status in the UK are exempt from corporation tax on its property rental business and also from capital gains tax incurred when selling these properties.
In exchange for this favourable tax treatment, one of the conditions imposed on a REIT is that they must distribute 90% of their tax-exempt profit to shareholders in the form of a dividend - known as Property Income Distribution (PID).
Therefore, REITs can represent a good income investment, as shareholders are guaranteed a dividend provided the REIT’s property rental business is making profit.
Because REITs are traded on a stock exchange, their price is determined by the levels of supply and demand in the market and fluctuate throughout the trading day. This means that sometimes the share price of the REIT is different to its Net Asset Value (NAV).
The NAV is calculated by dividing the net value of the fund’s holdings by the number of shares outstanding. If a REIT’s share price is trading lower than its NAV, it is said to be trading at a discount. If on the other hand, it is trading higher than its NAV, it is trading at a premium.
Below is the weekly chart for Regional, a UK REIT which invests in UK commercial property, with a focus on office buildings.
We can see that the REIT suffered a sharp drop in share price during the outbreak of the pandemic in March 2020, from which it has not yet fully recovered.
In the company’s annual report, released in April, we learn that, as of 31 December 2020, their portfolio was valued at £732.4 million. This equates to a NAV of 97.5p per share. At the time of writing (20 May 2021), the share price of Regional is around 88p, meaning that, based on its portfolio valuation from the end of 2020, the REIT is trading at a discount of around 10%.
We are also told in the report that in 2020, the dividend per share value was 6.4p - which represents a fairly attractive dividend yield of around 7% at the current share price.
If considering investing in property through a REIT, as well as information such as the above, another important metric to consider is the EPRA occupancy percentage. This figure represents, as a percentage, the estimated rental value of the currently let space divided by the estimated rental value of the entire portfolio. For Regional REIT, this figure was 89.4% at the end of 2020.
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You may already be familiar with mutual funds, but you may not have realised that some mutual funds specifically focus on the property market.
Property funds, or real estate funds, utilise a pool of investor capital to invest in a portfolio of property related securities. Property funds can be either actively or passively managed and can consist of a variety of different types of securities.
Some property funds invest directly in physical, usually commercial, properties and generate income from the rent, whilst others prefer to target shares, REITs, bonds or a mixture of all three.
Before investing in a property fund, it is very important to understand which of these approaches the fund takes, but before we get into that, let’s remind ourselves of the basic mechanics of a mutual fund.
When investing in a mutual fund - or, as here, a property fund - the investor purchases shares in the fund from the company who manages it. The price at which the investor buys into the fund, the NAV, is calculated once a day, at the close of the market, and this price is then fixed until the close of the market the following day, regardless of what happens to the fund’s holdings in the meantime.
The same process happens in reverse when an investor decides it is time to exit the fund - their shares are sold back to the company at the NAV. All property funds hold a certain percentage of investor funds as cash, in order to be able to facilitate the liquidation of an investor’s position.
The Risk of Property Funds
Now, remember we said that it is important to understand whether a fund invests in physical property or in shares, REITs and bonds? Well, this is why: if a higher than expected number of investors decide that it is time to cash in on their investment at the same time - it is possible, and not at all unheard of - that the fund manager will not have enough cash on hand to facilitate all these requests at once.
The outcome of this situation is that the fund will need to sell some of their holdings in order to comply with their investors’ wishes. Whilst shares and REITs are generally, of course not always, straightforward and quick to sell, by comparison, property, in particular commercial property, is neither of these things.
Even a quick property sale can take months; surveyors need to be engaged, solicitors prepared, loans approved and, in the meantime, investors are waiting, unable to withdraw their money. This can lead to fund managers selling the most attractive properties in the portfolio to facilitate a quicker sale, leaving the remaining investors with the less attractive holdings.
During the pandemic, several UK property funds were suspended as valuers were unable to assign accurate values to commercial properties. Insurer Aviva suspended three of their property funds for 16 months, finally taking the decision in May 2021 to close them. After more than a year of inaction, investors now have to wait for the funds to be wound down before they receive their money back.
All this is to say, be wary of property funds which only invest in property directly!
Property Exchange-Traded Funds (ETFs) share some similarities with property funds. They both use investor capital to purchase a basket of securities within the property sector and can both be either passively or actively managed.
However, property ETFs tend to be passively managed. In other words, they are designed to track an underlying index. They do not directly invest in any physical property but instead tend to hold REITs, shares in real estate related companies or bonds.
Unlike mutual funds, ETFs are listed on stock exchanges and, just like shares, are bought and sold throughout the trading day. This means that if an investor wishes to liquidate their position, they must find a counterparty to sell their ETF shares to.
Unlike buying REITs or shares directly, property ETFs offer investors instant diversification across a basket of securities with a single investment. This way, your exposure to the property market is not limited to one company, but spread over many.
Furthermore, ETF management is very transparent - regularly reporting on their portfolio and any changes to their holdings.
Investing in Property with Admirals
An Invest.MT5 account from Admirals allows you to invest in property via REITs, stocks and ETFs! In order to start investing, follow these steps:
- Register for an Invest.MT5 account
- Download the MetaTrader 5 trading platform
- Press Control + U to bring up the ‘Symbols’ window shown below. Here you can search for the asset you wish to invest in. Once located, press ‘Show Symbol’ and then ‘OK’
- Head to the ‘Market Watch’ tab on the left hand side of your screen and locate the symbol which you added in the previous step. Once you have found it, right click and press ‘Chart Window’ to open its price chart.
- Press ‘New Order’ - which is located at the top of your screen. This will bring up a screen where you can fill out the amount of shares you wish to purchase as well as a stop loss and take profit if applicable.
Investing in property does not necessarily mean spending hundreds of thousands of pounds on a house and hopefully you are now more familiar with some of the alternative options available to investors who are feeling confident about the property sector.
Stocks, REITs, property funds and ETFs can all provide exposure to this market as well as diversification for your investment portfolio. However, as with any investment, all of these instruments carry a significant level of risk.
Before investing in property, it is important to thoroughly evaluate the investment in question and make sure that it aligns with your investment profile and objectives.
Investing with Admirals
Besides the property sector, an Invest.MT5 account allows you to invest in over 4,300 shares and over 300 ETFs from 15 of the largest stock exchanges in the world! Other benefits of this account include:
- Free use of the world renowned MetaTrader 5 trading platform
- Exclusive access to our Premium Analytics portal, where you can find all the latest news, economic events, market sentiment and technical insight - all at no additional cost!
- Opening an account with a minimum deposit of just €1
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.