The suspension of trading in many open-ended property funds in the aftermath of the EU referendum result was a stark demonstration of the problems of using this type of fund for real-estate investments. The illiquid nature of property means that if a lot of investors want to withdraw their money in hurry, the fund won't be able to raise cash quickly enough to meet their redemption requests, so the fund either needs to close or impose a heavy withdrawal penalty.
That's why MoneyWeek prefers listed funds for real-estate investment: because these are traded on the stock exchange, you can buy or sell whenever you choose. You may not get a good price if you want to sell during a panic, but you still have the option to do so.
Most listed UK property funds are structured as real-estate investment trusts (Reits). A Reit is a company that owns and often operates income-producing real estate, such as office buildings or shopping centres. Reits are required to pay out at least 90% of their income to shareholders, hence their popularity with income-seeking investors. They enjoy a special tax status that means they pay no corporation tax on qualifying rental income and capital gains.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Reits pay dividends in the form of a "property income distribution (PID)", which is paid after deduction of withholding tax at a rate of 20%. This tax can be avoided if the Reit is held within an individual savings account (Isa) or a self-invested personal pension (Sipp), when your stockbroker should either pay the PID gross of tax or reclaim it subsequently.
UK property is certainly not exceptionally cheap at present, but the FTSE EPRA/Nareit UK index of Reits trades on a yield of 3.35%, in line with its ten-year average. You can buy individual Reits, which can allow you to pick specific sectors of the commercial property market in which to invest, but you can also invest in a basket of UK Reits through the iShares UK Property exchange-traded fund (LSE: IUKP see chart above), which tracks the FTSE EPRA/Nareit UK index.
This ETF is quite concentrated in a small number of Reits the two largest investments, Land Securities and British Land together account for about 30% of its holdings. And the underlying holdings are biased towards London commercial property. However, it offers a simple way to invest in this asset class.
Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.
Who is the richest person in the world?
The top five richest people in the world have a combined net worth of $825 billion. Who takes the crown for the richest person in the world?
By Vaishali Varu Published
Top 10 stocks with highest growth over past decade - from Nvidia, Microsoft to Netflix, which companies made you the most money?
We reveal the 10 global companies with the biggest returns since 2013. One firm has posted an astonishing 9,870% return, meaning a £1,000 investment would now be worth almost £82,000.
By Ruth Emery Published