Property Tracker

Zola.

I've been considering adding some property into the mix.

I was looking at BlackRock Global Property Secs. Eq. Tracker. What do you guys think of this fund, or would you recommend another?

Morning star gave it 4 stars but a below average rating for sustainability, so at this moment not too sure if its the right one.

5 Years Annualised @ 12.64%

dunstonh

I was looking at BlackRock Global Property Secs. Eq. Tracker. What do you guys think of this fund, or would you recommend another?

It is a property share fund rather than bricks and mortar. So much higher risk. So, remember you are not really diversifying into property when you use a fund like this as it is 100% equity. It will also increase the volatility of your fund whereas bricks and mortar funds tend to lower the volatility.

Morning star gave it 4 stars but a below average rating for sustainability, so at this moment not too sure if its the right one.

Who cares about ratings? Ignore ratings.

bowlhead99

I agree with dunstonh to avoid reading too much into short term ratings. Especially the "sustainability" one. That is trying to measure the performance in relation to having "sustainable" or "responsible" investment objectives, and whether the companies it holds have clear environmental, social, or governance (ESG) features.

You know the Blackrock fund is just investing into one massive pile of property developers and commercial property owners the world over ; the fund itself doesn't have any ESG objectives, just being a tracker and only investing in a single sector -property. Any ESG score is going to be similar to other random selections of big piles of property company shares. If you tried to only invest in the very best developers with ESG credentials you would have a different and expensive to run fund, missing all the massive REITs who are only ever going to be "average" or below on ESG because they don't look for those features when buying a building.

The rest of my (long) post involves some cut and paste from my previous comments with some updating of the figures. Enjoy!

5 Years Annualised @ 12.64%

The 12.6% is a flattering return of course.

There has been a large devaluation of sterling so assets in foreign currencies are worth more pounds. Over 95% by value of the real estate companies in the FTSE EPRA/NAREIT Developed index, which the Blackrock fund attempts to track, are outside the UK. So, no wonder the fund has delivered nice returns to UK investors. In USD, the last five years return of the index (to end of Jan) was 8.8%, which would be 8.6% after fees, so about 4% a year worse than the nice numbers you see.

And that in itself was flattering because the dollar returns for the index in each of the last five Jan-Dec calendar years were all positive figures - from 0.1% to 28%. No negative years. But that high 28% one for 2012 followed a period of loss in 2011.

To get an idea of volatility you could look further back on the underlying index to the five calendar years before that, 2007 to 2011, for a dollar investor it reads: -7%, -47.7%, +38.3%, +20.4%, -5.8%. So you start the first year with $100 and by the end of the year you had $93. Then next year you lost nearly half of that... And after the five years, before accounting for money lost to fees, your $100 would still only be down at $76. That's quite a long way from your nice 12.6% year on year profit that you might think you could get from it.

So, don't by any stretch of the imagination think that this is a conservative fund which will always act as a diversifier to your global equities. What it is, is actually a specialist subset of equities listed on the global markets, which are in the "investing in property" industry.

The 300-odd property companies in the index represent about $1.4 trillion market cap in developed countries, which you will already own through a developed world equity index ($35tn) or global all-world index ($39tn) or global all-cap index ($44tn). Those companies can borrow to support their investing or development activities - and depending on supply and demand to own any one of them over an economic cycle, a company in the portfolio can swing in value from being priced at a 20%+ premium to their underlying assets, to 25% below.

I mentioned in another thread that investing in a global world equity index implied a high level of risk tolerance and risk capacity because as an example, the highest peak-to-trough drawdown in the FTSE All-World equity index in the last ten years in USD terms was 58%. Same question for the specialist subset of the developed world index that are large property holding or development companies (FTSE EPRA/NAREIT Developed index)? - 72%. Ouch. $100 in the good times was temporarily valued at $28 in the bad.

An advantage to holding a portfolio of REITs for a retail investor is the fact that although the underlying assets are static and illiquid and take a long time to buy or sell, you can (almost always) sell your shares in the company whenever you like. Someone will buy it off you even if that means accepting 50% discount to what you think is the fair underlying value of the assets, and not care that you previously paid 20% over fair value of the assets a year or two earlier when the manager was talk of the town.

By contrast, an open-ended fund that directly holds individual properties itself, may not allow you to walk away with your money if you want to redeem out tomorrow. As some investors found last summer in the UK open ended property funds, they may have to freeze redemptions or impose "gating restrictions" because they can't practically sell off a small fraction of a shopping centre or one floor of an office building if a bunch of investors all want to exit at once. Keeping cash on hand to allow for that, can be a natural drag on performance. And theoretically if a lot of people stampede for the exit at once and those "we all wanna dump this fund" conditions persist, they may ultimately have to sell a property against their better judgement to get hold of cash to pay out the departing investors - and a "fire sale" of assets with good prospects is a bad way to make profits in the property game.

So, funds that invest in property company shares: volatile swings, not much of a safe haven if the bottom drops out of the market due to things like credit crunch, high interest rates, everyone in risk: off mode etc

Funds that invest directly into property: less frequent valuations, fewer mood swings, perhaps structurally less sound.

However you will find that real long-term investors who are not going to want to redeem out on a whim - local council pension funds for example, or big foundations or endowments - find direct commercial property funds to be a good long term source of income and gradual decent gains over time as a piece of their portfolio that doesn't have the volatility and market randomness of global equities. They can particularly invest in big private funds where everyone is patient and nobody is going to want to redeem.

Retail investors are not always so patient.

- On the one hand, some of them will invest in funds that are open ended and have gating restrictions to preserve the asset value in the best interest of all investors, but then they get frustrated that they can't sell out when they want. Not that they should even be trying to sell out when the property market is gong through a low point, but some investors are funny like that.

- Other investors will invest in reits or funds-of-reits because they like liquidity and instant exposure of their money to hard assets scattered around the globe with no withdrawal restrictions. There are not many managers who could give you global exposure to direct commercial property in a single open ended fund and monitor and develop the portfolio properly. So something like a global fund holding a bunch of Reits seems great for quick and dirty exposure. But then those investors who should have properly researched what they were getting into, get frustrated that they take a massive haircut to get their money back in a downturn when the companies move quickly to a discount.

The reputation of closed-ended stock market listed funds was not helped by the fact that Reits as a tax efficient closed-ended product was launched in the UK in about 2006/7, followed by an almighty credit crunch and deep discounts and maybe some outright failures. And memories of things you invest in that are touted as next big thing but go sour, are hard to forget.

There are of course some advantages in things that can swing from discount price to premium price. Because in down periods you can benefit from what you perceive to be "market dislocation". So maybe if you find a good global fund manager he can buy in and sell out of different property funds in different regions exploiting that dislocation. There won't be many who consistently succeed of course. The Blackrock fund does not even try, it just buys and holds everything it sees in the index, and will diligently track it 20% up in some years and 50% down in other years.

So with the Reit index fund, the fund manager himself does not try to exploit prices, but you yourself can try, by only buying in to the tracker when the world is in discount mode. Which we haven't seen for a while given the high price of equities and bonds and low yields from fixed income assets. The portfolio value fluctuations experienced by a global REIT tracker investor are quite different to those experienced by a pension fund that just puts £200m into a direct property fund and holds out through thick and thin taking the steady rental income to pump into his other assets at equity market lows or to provide an income stream for his pensioners.

Some people are a bit sceptical of "property trackers" and prefer to buy and hold a couple of direct property funds, like the institutional pension fund. But basically you need to make a choice between Reit or direct, and then if Reit, personally actively selected, or tracker.

As an example of a compromise, my Mum's ISA portfolio has a UK commercial property open ended fund and a generalist Reit and a specialist Reit ; my Dad's has the "quick and dirty" approach of that Blackrock fund along with two other specialist UK reits. As my Dad's property piece is more internationalized and also inherently more volatile, he has more in the way of other lower volatility assets in the broader portfolio.

Overall between them, they have a fair old mix and some decent diversification, but are not under the illusion that the "international tracker of REITs" is just like owning a few office blocks and shopping centres. It is like owning a pile of equities in a single sector.

JUAN8888

Coincendentally, I've been looking at investing in property REITs/funds too so it was interesting to see your question, and read bowlhead's very informative reply. Some of the ones that caught my eye are: iShares UK Property UCITS/ETF (iukp.l) Capital & Regional Plc (cal.l) Standard Life Investments Property Income Trust Limited (sli.l) These have cropped up in general reading/Googling so would be interested in any views on them for a long term hold with a view principally to yield.

Zola.

bowlhead99 wrote: »

I agree with dunstonh to avoid reading too much into short term ratings. Especially the "sustainability" one. That is trying to measure the performance in relation to having "sustainable" or "responsible" investment objectives, and whether the companies it holds have clear environmental, social, or governance (ESG) features.

You know the Blackrock fund is just investing into one massive pile of property developers and commercial property owners the world over ; the fund itself doesn't have any ESG objectives, just being a tracker and only investing in a single sector -property. Any ESG score is going to be similar to other random selections of big piles of property company shares. If you tried to only invest in the very best developers with ESG credentials you would have a different and expensive to run fund, missing all the massive REITs who are only ever going to be "average" or below on ESG because they don't look for those features when buying a building.

The rest of my (long) post involves some cut and paste from my previous comments with some updating of the figures. Enjoy!

The 12.6% is a flattering return of course.

There has been a large devaluation of sterling so assets in foreign currencies are worth more pounds. Over 95% by value of the real estate companies in the FTSE EPRA/NAREIT Developed index, which the Blackrock fund attempts to track, are outside the UK. So, no wonder the fund has delivered nice returns to UK investors. In USD, the last five years return of the index (to end of Jan) was 8.8%, which would be 8.6% after fees, so about 4% a year worse than the nice numbers you see.

And that in itself was flattering because the dollar returns for the index in each of the last five Jan-Dec calendar years were all positive figures - from 0.1% to 28%. No negative years. But that high 28% one for 2012 followed a period of loss in 2011.

To get an idea of volatility you could look further back on the underlying index to the five calendar years before that, 2007 to 2011, for a dollar investor it reads: -7%, -47.7%, +38.3%, +20.4%, -5.8%. So you start the first year with $100 and by the end of the year you had $93. Then next year you lost nearly half of that... And after the five years, before accounting for money lost to fees, your $100 would still only be down at $76. That's quite a long way from your nice 12.6% year on year profit that you might think you could get from it.

So, don't by any stretch of the imagination think that this is a conservative fund which will always act as a diversifier to your global equities. What it is, is actually a specialist subset of equities listed on the global markets, which are in the "investing in property" industry.

The 300-odd property companies in the index represent about $1.4 trillion market cap in developed countries, which you will already own through a developed world equity index ($35tn) or global all-world index ($39tn) or global all-cap index ($44tn). Those companies can borrow to support their investing or development activities - and depending on supply and demand to own any one of them over an economic cycle, a company in the portfolio can swing in value from being priced at a 20%+ premium to their underlying assets, to 25% below.

I mentioned in another thread that investing in a global world equity index implied a high level of risk tolerance and risk capacity because as an example, the highest peak-to-trough drawdown in the FTSE All-World equity index in the last ten years in USD terms was 58%. Same question for the specialist subset of the developed world index that are large property holding or development companies (FTSE EPRA/NAREIT Developed index)? - 72%. Ouch. $100 in the good times was temporarily valued at $28 in the bad.

An advantage to holding a portfolio of REITs for a retail investor is the fact that although the underlying assets are static and illiquid and take a long time to buy or sell, you can (almost always) sell your shares in the company whenever you like. Someone will buy it off you even if that means accepting 50% discount to what you think is the fair underlying value of the assets, and not care that you previously paid 20% over fair value of the assets a year or two earlier when the manager was talk of the town.

By contrast, an open-ended fund that directly holds individual properties itself, may not allow you to walk away with your money if you want to redeem out tomorrow. As some investors found last summer in the UK open ended property funds, they may have to freeze redemptions or impose "gating restrictions" because they can't practically sell off a small fraction of a shopping centre or one floor of an office building if a bunch of investors all want to exit at once. Keeping cash on hand to allow for that, can be a natural drag on performance. And theoretically if a lot of people stampede for the exit at once and those "we all wanna dump this fund" conditions persist, they may ultimately have to sell a property against their better judgement to get hold of cash to pay out the departing investors - and a "fire sale" of assets with good prospects is a bad way to make profits in the property game.

So, funds that invest in property company shares: volatile swings, not much of a safe haven if the bottom drops out of the market due to things like credit crunch, high interest rates, everyone in risk: off mode etc

Funds that invest directly into property: less frequent valuations, fewer mood swings, perhaps structurally less sound.

However you will find that real long-term investors who are not going to want to redeem out on a whim - local council pension funds for example, or big foundations or endowments - find direct commercial property funds to be a good long term source of income and gradual decent gains over time as a piece of their portfolio that doesn't have the volatility and market randomness of global equities. They can particularly invest in big private funds where everyone is patient and nobody is going to want to redeem.

Retail investors are not always so patient.

- On the one hand, some of them will invest in funds that are open ended and have gating restrictions to preserve the asset value in the best interest of all investors, but then they get frustrated that they can't sell out when they want. Not that they should even be trying to sell out when the property market is gong through a low point, but some investors are funny like that.

- Other investors will invest in reits or funds-of-reits because they like liquidity and instant exposure of their money to hard assets scattered around the globe with no withdrawal restrictions. There are not many managers who could give you global exposure to direct commercial property in a single open ended fund and monitor and develop the portfolio properly. So something like a global fund holding a bunch of Reits seems great for quick and dirty exposure. But then those investors who should have properly researched what they were getting into, get frustrated that they take a massive haircut to get their money back in a downturn when the companies move quickly to a discount.

The reputation of closed-ended stock market listed funds was not helped by the fact that Reits as a tax efficient closed-ended product was launched in the UK in about 2006/7, followed by an almighty credit crunch and deep discounts and maybe some outright failures. And memories of things you invest in that are touted as next big thing but go sour, are hard to forget.

There are of course some advantages in things that can swing from discount price to premium price. Because in down periods you can benefit from what you perceive to be "market dislocation". So maybe if you find a good global fund manager he can buy in and sell out of different property funds in different regions exploiting that dislocation. There won't be many who consistently succeed of course. The Blackrock fund does not even try, it just buys and holds everything it sees in the index, and will diligently track it 20% up in some years and 50% down in other years.

So with the Reit index fund, the fund manager himself does not try to exploit prices, but you yourself can try, by only buying in to the tracker when the world is in discount mode. Which we haven't seen for a while given the high price of equities and bonds and low yields from fixed income assets. The portfolio value fluctuations experienced by a global REIT tracker investor are quite different to those experienced by a pension fund that just puts £200m into a direct property fund and holds out through thick and thin taking the steady rental income to pump into his other assets at equity market lows or to provide an income stream for his pensioners.

Some people are a bit sceptical of "property trackers" and prefer to buy and hold a couple of direct property funds, like the institutional pension fund. But basically you need to make a choice between Reit or direct, and then if Reit, personally actively selected, or tracker.

As an example of a compromise, my Mum's ISA portfolio has a UK commercial property open ended fund and a generalist Reit and a specialist Reit ; my Dad's has the "quick and dirty" approach of that Blackrock fund along with two other specialist UK reits. As my Dad's property piece is more internationalized and also inherently more volatile, he has more in the way of other lower volatility assets in the broader portfolio.

Overall between them, they have a fair old mix and some decent diversification, but are not under the illusion that the "international tracker of REITs" is just like owning a few office blocks and shopping centres. It is like owning a pile of equities in a single sector.

Thanks very much! I'm after a more conservative approach and you have definitely convinced me to hold back on this one. Maybe I will avoid property mixes in general.

chockydavid1983

JUAN8888 wrote: »

Coincendentally, I've been looking at investing in property REITs/funds too so it was interesting to see your question, and read bowlhead's very informative reply. Some of the ones that caught my eye are: iShares UK Property UCITS/ETF (iukp.l) Capital & Regional Plc (cal.l) Standard Life Investments Property Income Trust Limited (sli.l) These have cropped up in general reading/Googling so would be interested in any views on them for a long term hold with a view principally to yield.

I'm very interested in adding property to my portfolio and thanks also to Bowlhead. How do you know if a fund is a REIT or direct property? Are there key words to look for or types of holdings? Ideally I would like to invest in a global direct property fund but maybe you have to do it more per region?

dunstonh

How do you know if a fund is a REIT or direct property?

Easy. Just with all the funds you research, you look at the underlying assets. Direct property will list actual properties. Property shares will list equities.

chockydavid1983

Thanks Dunstonh

So, this would be direct property:
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/new-funds/f-and-c-uk-property-accumulation
And this a REIT:
https://iwebfunds.webfg.com/index.php?section=sheet&idShareclass=F00000S8SZ

Ah, just realised how to filter for direct property funds on Morning Star, presumably you can do this on other sites too :-)

MPN

Zola. wrote: »

Thanks very much! I'm after a more conservative approach and you have definitely convinced me to hold back on this one. Maybe I will avoid property mixes in general.

There is also the possibility of mixing both Property Shares and Direct Property funds?

Therefore, you can hold a small percentage in each with a Global Property Tracker like the Blackrock Fund you mentioned in your OP, mixed with an active UK Property Fund (such as the Royal London UK Property fund purely as an example)?

Linton

The whole point of investing in property is as diversification from the equity markets. So it seems pointless to go for a specialist property equity fund, property companies will in any case be included in any general tracker or in any non-niche equity managed fund. If you want Property just hold a relatively small % in a direct property fund.

lejog2003

While I agree with Bowlhead and Linton, I'm suprised no-one has mentioned the potential for liquidity problems with direct property funds. After the Brexit vote trading in many direct property funds was suspended for several months as properties had to be sold to cover withdrawals. And generally the price has only now returned to pre Brexit levels.

Are there any direct property funds which invest globally, or at least spread the risk further than the UK market? I guess such a fund would have to be large given the price of commercial properties.