Unit trusts are excellent investments that can give investors the opportunity to participate in the growth of large businesses and investment assets. Property unit trusts open a door to the property industry with more to offer than an individual could ever hope for in the buy-to-let market. Property funds invest in listed property companies that develop and manage real estate in different sectors (office, retail, commercial, residential) and geographies.
The benefits of investing in a unit trust rather than a buy-to-let property make a compelling case for why property unit trusts should be considered if you are looking to enter the property market. This article is focused on investors that already own a primary residence and are looking to invest in the property market.
The fund manager of a property unit trust selects which property companies to include in the portfolio, raising the likelihood of realising attractive returns on the investment. A buy-to-let property on the other hand could be situated in a neighbourhood where there is low growth and few tenants.
2. Historic performance
The total return from listed property has exceeded residential property over the last 5, 10 and 15 years to 30 June 2017 (see below table). Total return includes price appreciation and income. For residential property, an income yield of 7% is assumed with the average buy-to-let property providing income of between 5% and 8% after fees.
Adding property to your investment portfolio is a fantastic way to add diversification and potentially boost return. Most investors who buy a property to let will have to allocate a very large portion of their capital to the investment. This means you could risk a substantial portion of your portfolio on a poor investment decision. Unit trusts have much lower investment minimums. The Sharenet BCI Property Fund has a minimum lump sum investment of R25 000 (or R1 000 per month debit order). It allows the investor to only invest the amount that he/she is comfortable with.
Diversifying your portfolio across multiple asset classes can boost return and improve the consistency of your return. The concept is the same for diversifying between different property sectors such as shopping malls, office parks, warehouses and apartment blocks. Unit trusts also give investors exposure to these sectors across multiple cities (geographic diversification). Compare this to the very narrow exposure given by one apartment in one location, and you can start to see that the risk from investing in buy-to-let properties is higher.
Unit trusts are liquid investments, meaning you can withdraw your money and have it sitting in your bank account within days. Rental properties are not liquid and could take months (sometimes even years) to sell. Should you need to sell immediately, you may have to put the property up for sale at a much lower price and even then, it will be several weeks before you see the cash from the sale.
Unit trust fees include ongoing management, performance, admin and transaction fees. All these fees usually amount to less than 1.5% per annum for most property funds. Rental property fees dwarf that of unit trusts. To buy or sell a property will see fees associated with the transfer, agent, conveyancer, deeds and other administrative requirements. Ongoing costs will include insurance, taxes and levies. All these fees can cut a sizable chunk out of your property investment’s performance.
Rental properties carry a lot more risk than an investment in a unit trust. There is vacancy risk if you struggle to find a tenant or can’t get a tenant to pay, causing you to lose income. Listed property also has vacancies, but these are usually less than 10% of the property portfolio, meaning the bulk of the portfolio still delivers income each month. Rental property requires maintenance, and something like a geyser bursting is a problem that needs immediate fixing. Listed property is more volatile, however, and your investment can fluctuate a lot more than rental property.
A good case for rental property is that you can take on leverage and use a loan to finance your property investment. Many investors don’t know that listed property companies can also take on leverage and can use clever ways to finance property investments (and at a lower interest rate than individuals can get).
Investing in a unit trust is very simple and can be done within a few minutes. To invest with Sharenet, visit our Investments website. Rental property on the other requires a lot more of your time. You need to screen tenants, run credit checks, set up and negotiate contracts, do viewings, collect rent and address complaints to name a few. You can get an agent to do all of this for you, but that is additional cost that takes a bite out of your return.
10. Track performance
Unit trusts are priced daily and you can view the value of your portfolio online at any time. Fund managers are also required to provide a monthly fact sheet that shows how your money is invested. It is easier to track the performance of your investment than with rental property.
Property unit trusts hold all the cards relative to rental property. Listed property performance is historically higher than rental property. The risks associated with property unit trusts are less than with rental property overall, and unit trusts are also far easier and less time consuming to invest in than rental property. There are benefits of owning your first property (including tax breaks and cheaper borrowing), but this article focuses on buying-to-let property where the investor is looking for property exposure in addition to his/her primary residence.
It is easy to add property to your investment portfolio, and now you can invest with Sharenet. Visit our Sharenet BCI Property Fund page to find out more.
Quantitative Investment Analyst
Ian Stiglingh is a full time quantitative analyst, responsible for research of equities across all industries. Ian completed his degree in Mathematical Science in 2013 and his Honours degree in Financial Risk Management in 2014, both at the University of Stellenbosch. During his studies, Ian worked as an intern at Old Mutual Actuaries & Consultants as well as J.P. Morgan in Johannesburg, and is currently a CFA candidate