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Any seasoned Monopoly player will know the value of building up a strong real estate portfolio. The trouble is, in the real world, you’re not investing with Monopoly money. It’s hard enough to purchase your own house, let alone diversify into other properties.
The good news, however, is that you don’t have to purchase physical properties to invest in UK real estate. There are ways to gain exposure to this sector requiring less capital – and stress – than buying a house.
Let’s look at what these are, how much money it takes to invest this way and what the potential risks and rewards are.
Remember, like any investment, the value of property can go up and down and your capital is at risk.
Why do people seek to invest in property in the first place?
In general terms, the price of property has increased over the long term. It’s viewed by many as a solid long-term investment.
For example, according to data from the Nationwide house price index, the average UK house would have appreciated by almost 60% between the beginning of 2013 and the end of 2023. Over the long run, owning property could help to beat inflation and provide a return to build wealth.
Property investments are also turned to for diversification within a portfolio. Investors hungry for income could additionally look to real estate to provide a steady stream of rents.
What about the risks?
Of course, property values don’t always increase. During a “credit crunch”, for example, when banks lend less money, fewer people will be able to obtain a mortgage. As a result, demand for house buying will fall and, as the logic goes, prices will follow.
Property is also an illiquid asset. That means it can’t generally be bought or sold easily – anyone who’s gone through the process of selling their house can probably relate. It’s not an investment you can offload quickly if you’re suddenly in need of cash.
The good news here is there are options for investing in property that offer some liquidity. We’ll look into them in a little bit.
How much money do I need to start investing in property?
Investing in UK property doesn’t require much money at all. It’s possible to build exposure to the asset class with as little as a few hundred pounds – and sometimes even less. As mentioned above, you also don’t need to worry about finding an estate agent or actually buying a house.
One of the simplest ways to get involved in the sector is through real estate investment trusts (REITs). The trust, which issues shares on the stock exchange, owns properties. By owning shares in it, you effectively own a piece of these properties.
There are other options available too. Some investors prefer to purchase shares in a property-focused mutual fund or ETF. These may invest in several REITs on investors’ behalf. Or, they may purchase shares in real estate-linked companies.
Of course, another choice investors can make is to seek out the shares of individual homebuilding firms. It’s very likely the performance of these will be impacted by the overall property market, but it could also be influenced by other factors – such as how the company’s management team acts and decisions it takes.
In all of these options you’d be investing by purchasing shares that trade on an exchange – therefore offering more liquidity than if you bought an actual property as an investment.
Let’s look at these three options in a little more detail.
As noted above, REITs are trusts which invest in property. Shares in these trusts are traded on exchanges, meaning you as an investor can gain exposure to whatever the REIT buys.
There are two main types of REIT: equity REITs and mortgage REITs.
An equity REIT will directly purchase real estate. It will then look to generate returns by collecting rent payments on this property. For example, an equity REIT may purchase an office block and rent it out to a few businesses. The rents paid by these businesses will then be distributed to investors who own shares in the REIT.
Some equity REITs may focus on a specific sector. For example, you may find one that focusses on office buildings or one that only purchases real estate used for retail businesses.
Then there are mortgage REITs. As the name suggests, these seek to lend money to parties that want to purchase property. They then generate income by collecting interest payments on the money they lend.
If you invest in a REIT, you’ll likely have to pay a management fee, just like you would with an ETF, mutual fund or investment trust.
REITs offer the potential of generating a return in two ways. Firstly, investors will be entitled to receive a portion of the rents and/or other income generated by the underlying property portfolio. Secondly, since shares of REITs trade on exchanges, an investor could generate a return by purchasing a share in a REIT at a low price and then selling it for a higher amount later – just like you would with a stock.
Of course, as with any stock, the price at which a REIT trades on an exchange can also fall in value. It’s also possible that rents aren’t collected or are reduced due to economic conditions. These are risks you need to take into account before parting with your money.
As the name suggests, property ETFs are exchange-traded funds that offer exposure to the real estate sector. As with other ETFs – which you can read about here – they allow investors to take a more diversified position than if they were to just buy shares in a single REIT or homebuilding company.
An ETF may, for example, invest across several REITs. It could be invested in a variety of REITs focusing on the same sector of the real estate market. Or, it could offer diversification by spreading holdings across a bunch of REITs with different focuses.
Other ETFs may take a different approach, investing in stocks of homebuilders.
As with any ETF, it’s important to understand exactly what approach is being taken. Reading through the key documentation is important when investing in these products so you know exactly what you’re exposed to.
If you’re willing and able to do your own research, then you could gain exposure to the property market by investing in the shares of homebuilding companies.
Homebuilders tend to do well when the property market is on the up. Strong demand for housing means more homes need to be built. And, as we know, when demand outweighs supply prices go up. Those new homes will, in theory, be able to be sold at a higher price and that’s good news for the companies that are building them.
Remember, there are some additional risks present when investing in individual stocks. Backing a company that’s able to outperform its peers could mean you see returns above those of the property sector as a whole. On the other hand, if your investment lags its competitors then overall returns may well be below what the rest of the industry sees.
It’s also important to note that the performance of individual stocks can be affected by multiple factors. The property market could be thriving, but if the company you’ve invested in is embroiled in a scandal or there are questions about its leadership then its stock price may suffer.
All this is to say that, if you want to invest in an individual homebuilding company, it’s a good idea to do your research, understand how the firm stacks up against its peers and have some insight into its governance.
What could affect the performance of my property investment?
As with any investment, there are many factors that could influence the price of property:
Supply and demand: The more properties that are up for sale, the more real estate prices will be weighed down as potential buyers have more choice. Of course, if there are more buyers than there are properties, then prices will be pushed up.
Interest rates: House prices tend to move inversely with these (although not always). As interest rates rise, the costs of borrowing – and therefore mortgages – increases. This tends to lower property prices.
Rental yields: These can affect the price of properties. If properties are cheap relative to the potential rents that can be earned, then people tend to start buying properties more, pushing prices up. If properties are expensive relative to what can be earned from rents, then owners are more inclined to sell, pushing prices down.
Stamp duty holidays: Having to pay tax affects how people purchase things. If there is a first-time homebuyer exemption on stamp duty for a certain amount of time, this will help lure in additional buyers, which may help push property prices higher.
Mortgage availability: If lenders are less eager to hand out loans, that will mean fewer buyers and property prices may fall. When a mortgage is easier to come by, that means more potential buyers to push prices up.
So, there you have it. You don’t have to be a homeowner to be invested in the UK property sector.