Battersea Power Station (under development).Photo by John Cameron on Unsplash

Property as fourth asset class: UK REITs outperform stock market

Jonathon Curtis, Investment Analyst, looks at the pros and cons of investing in property and examines the role it can play in a portfolio.

In the second of this four-part series we’ll lift the lid on investing in property. Please note that this article is not personal advice and if you’re unsure that an investment is right for you, seek advice. All investments fall as well as rise in value, so you could get back less than you invest. Yields are variable, not guaranteed, nor a reliable indicator of future income. (READ PART ONE: COMMODITIES)

Chart: UK property investment vs stock market. Hargreaves Lansdown

Much more than buy-to-let

Property is a giant asset class. So much so that it’s sometimes called the fourth asset class, after shares, bonds and cash. Many people’s first thought about investing in property is buy-to-let. Inspired by decades of house price growth and TV programmes such as Homes Under The Hammer, there are around 2.5 million buy-to-let investors in the UK. But commercial property also forms a large part of the investment property sector, and performance is driven by far more factors than the residential market.

Commercial property is usually divided into three parts: industrial, office and retail. Industrial properties include warehouses, factories and distribution centres. Offices are normally either city centre blocks or out-of-town office parks. Retail includes high-street shops and shopping malls. There is also an alternative property sector, which includes hospitals and doctors surgeries, retirement communities, student accommodation and leisure centres.

Aside from bricks and mortar, there are also opportunities to invest in land with development potential, and even farms and forests, which could provide investors with some potentially useful tax benefits. Property is a diverse as well as enormous sector. Remember that tax rules change and benefits depend on individual circumstances.

Should I invest in property?

Investing in property is popular. The basic concept is easy to understand and many investors are reassured by the physical nature of bricks and mortar. Property often performs differently to the stock market so could provide some useful diversification to a portfolio for those who are happy to accept the risks. It also gives investors the potential for capital growth and healthy yields from the rent tenants pay.

There are of course downsides too. Unlike buying and selling shares and bonds, physical property transactions can be lengthy, expensive and downright stressful. And once a property has been let there are often lots of costs associated with maintenance and repair, taxes, insurance, agent fees, not to mention the potential for bad tenants and times when the property is empty…

visit Hargreaves Lansdown to read full story

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