Understanding Real Estate Investment Funds and Your Property Investment Options

11 Oct 2023

Investing in real estate has long been a popular way to build wealth and diversify one's investment portfolio. Property investment funds and Real Estate Investment Trusts (REITs) are two attractive options for investors looking to tap into the real estate market if they are not looking for direct property ownership. We spoke to Selina Williams, Executive Director of IP Investment Management, who specialises in this area, to give insights into the options and how to navigate your investments.

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What does IPIM do?

IP Investment Management is a licensed fund management business with offices in Hong Kong, Singapore and London. We manage private closed-end real estate funds, and our funds are available to professional / accredited investors or professional clients only.

We mainly invest in the “living” sectors – i.e. purpose-built student accommodation and build-to-rent/multifamily. Our real estate investments are mostly in the UK, mainland Europe and the US.”

Understanding Property Investment Funds & REITs

Real estate investment funds and REITs are companies that own, operate, or finance income-generating real estate properties. These properties can include office buildings, shopping centres, residential complexes, hotels, industrial warehouses, and more.

Both offer investors the opportunity to invest in real estate without directly owning physical properties. Instead, they can buy shares in a REIT or property investment fund, which then uses the invested capital to acquire and manage a diversified portfolio of properties.

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What is the difference between Real Estate Investment Trusts (REITs) and Funds?

“REITs are listed, which means shares in a REIT can be traded on a stock market. They must follow quite strict rules on leverage, distribution of rental income, and the percentage of property development they can undertake.

Funds is a more generic term for a collective investment structure and can encompass many different types of structure, that may or may not be regulated or must follow certain rules, depending on where it is based.”

Benefits of Investing in Real Estate Investment Funds

One of the primary advantages is diversification. Property investment funds own a diverse portfolio of properties spanning various sectors and geographical locations, which helps mitigate risk and reduce the impact of market fluctuations on an investor's overall holdings. Additionally, professional management ensures that experts make strategic decisions, manage property acquisition, and optimise returns, utilising their specialised knowledge and resources.

Liquidity is another notable benefit, as certain property investment funds, like REITs and Exchange Traded Funds (ETFs), provide ease of buying and selling on stock exchanges. These funds generate income through dividends or rental income, making them attractive to income-focused investors, while the potential for capital appreciation adds to their appeal.

These benefits, coupled with professional management and lower entry barriers, position property investment funds as a versatile and accessible route to real estate investment.

Risks Associated with Real Estate Investment Funds

Investing in real estate through property investment funds and Real Estate Investment Trusts (REITs) presents numerous benefits, but it's vital to be aware of associated risks.

Market fluctuations can impact property values, and rising interest rates can increase borrowing costs, affecting the performance of both investment vehicles. Liquidity varies among funds, and the effectiveness of fund management can significantly influence returns. Property-specific challenges, such as vacancies and maintenance, must be considered, and regulatory changes can impact taxation and returns.

With REITs, sector concentration and dividend risk should be acknowledged. REITs are also exposed to sector specific challenges such as shifts in consumer behaviour, which can impact retail property performance. To navigate these risks effectively, thorough due diligence is essential, encompassing historical performance, property quality, management expertise, and alignment with financial goals, while diversification across sectors can mitigate specific market-related risks.

What measures are in place to mitigate risk/how secure is my investment?

“The funds that IPIM manages are high risk investments in private equity that are illiquid and could lead to the full loss of capital – which is why they are only available to professional/accredited investors or professional clients.

On the other hand, there are funds aimed at retail investors that may be lower risk. However, the level of risk usually reflects the potential returns.”

Start Investing

The first step when embarking on a new investment strategy should always be research. Begin by educating yourself about these investment options, understanding their potential benefits, and acknowledging the associated risks.

Determine your investment goals and assess your financial situation to get an understanding of the resources you can allocate. Then, choose your preferred investment vehicle: property investment funds offer diversification and professional management, while REITs provide liquidity and flexibility.

Conduct thorough due diligence by researching available funds or REITs, reviewing their historical performance, and assessing the expertise of their management teams.

If you haven’t already done so, open a brokerage account, which will grant you access to trade REIT stocks or ETFs on the stock exchange. Regularly monitor your investments, stay informed about market trends, and be prepared for both short-term fluctuations and long-term growth.

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How does one exit a Fund?

“It depends on the type of fund. If it’s a listed fund (an ETF – exchange traded fund), it can be traded on a stock market. If it’s an unlisted open-ended fund, then daily, monthly, or quarterly trading should be possible – although during times of market turbulence trading in these open-ended funds may be suspended.

For closed ended funds such as those managed by IPIM, an exit at the request of the investor is not usually possible – the investor has to remain invested for the full term of the fund, until the underlying investments are sold.”

With a well-informed approach, property stock investments can offer a rewarding and accessible entry point into the dynamic world of real estate. When making investment decisions, it's crucial to understand the unique benefits and risks, as well as conduct thorough due diligence.

If you are unsure if you would qualify as a professional investor or equivalent, please speak to your financial advisor. If you are a professional investor and would like to get more information on IPIM or if you would like to speak to one of our experienced IP Global consultants about your real estate investment options, get in touch with us and we would be happy to help.

FAQs

Real estate investment funds and REITs are companies that own, operate, or finance income-generating real estate properties. These properties can include office buildings, shopping centres, residential complexes, hotels, industrial warehouses, and more.

REIT stands for Real Estate Investment Trust.

REIT's offer investors the opportunity to invest in real estate without directly owning physical properties. Instead, you to buy shares in a REIT or property investment fund, which then uses the invested capital to acquire and manage a diversified portfolio of properties.

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