Another downer for international property funds

The property asset class can form an important part of a well diversified investment portfolio.

Because property tends to behave differently to equities and fixed income securities, it helps investors to reduce risks through negative correlation with these other asset classes.

Commercial property is also attractive to investors as a result of the income yields it offers. Relative to cash and gilts at the moment, the yields on commercial property look very appealing.

When selecting funds to populate the property asset class, investors need to understand the difference between traditional ‘bricks and mortar’ funds investing in UK commercial property and everything else in the IMA Property sector.

Here at Informed Choice, we favour property funds investing in these British assets, rather than funds investing in the shares of property companies and those investing in overseas property or property company shares.

Some news from Singapore this week serves to highlight the risk of using non-UK property funds.

In an attempt to curb rapidly growing prices, authorities in Singapore have introduced higher taxes on industrial and residential property.

Shares in several big property companies have fallen as a result, by between 6% and 7.5% in early trading.

Political interference in a property market is one reason why investors should treat overseas property funds with caution.

They also introduce a level of currency risk to a portfolio, as well as failing to deliver the same risk and diversification characteristics as UK commercial property funds.

In fact, investing indirectly in these foreign assets could see the property part of a portfolio behaving more like the overseas equities in which investors have already invested.

When it comes to populating the property asset class within a portfolio, investors are usually best served by sticking with funds which invest in bricks and mortar here at home in the UK.

Photo credit: Flickr/cprogrammer