IUKP – Should you invest in a property fund like this?
A friend of mine is planning to sell his UK property, wack the proceeds in the market, and live property free forever after. His only worry? Stepping off the housing ladder. Hence, he is thinking about investing in iShares UK Property UCITS ETF (IUKP) to maintain some exposure to property.
On the face of it, it sounds like a good plan. But is it?
He asked me what I thought about investing in IUKP, and more generally a UK property fund or REIT (Real Estate Investment Trust). I gave him the following reasons why I don’t invest in IUKP or something similar:
- Equity index funds are exposed to enough property
- I have a house
- Simplicity
- Tax
- Diversification
- Money
I’ve unpacked each of these below.
But, as I can also understand where he his coming from, I gave him a few other options which in my opinion beat investing in IUKP.
Let’s get into it.
Equity index funds are exposed to enough property
So the theory goes, if you’re invested in a diversified index fund you are going to be exposed to property companies. In fact, the UK indices like the FTSE100 & FTSE 250 contain a lot of the same companies as IUKP, if not all of them. On top of that, all the big indexes are packed full of banks which are heavily exposed to property through mortgages.
Construction and industrial companies will also be heavily exposed to property. Not to mention the fact that just about every company is housed in a building in some form. The ‘home’ part of the ‘working from home’ equation suggests the need for bricks and mortar. So, I think I have enough exposure to property through my stock index fund.
I’d rather stick all my money into an index fund than put it into a dedicated property fund.
That doesn’t mean I can’t see the argument that stocks and property are a different beast for the simple reason that prices of these two assets don’t go up in tandem.
I’d agree with that. What’s less clear is whether a large property fund like IUKP is giving you the property exposure you require. Let me explain:
You see, I think the key asset here is land. I think most serious property investors would agree its more about being exposed to the land cycle than anything.
In other words, the land market is the thing you want exposure to. As it was said hundreds of years ago in the Talmud:
Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.
Stick a building on some land and you get a bit closer shares. Turn that building into a business and you are closer still. Grow that business until it’s big enough to float on the stock market and you’ve moved about as far away from pure land and as close to any other large business as you are going to get.
In other words a big fund of REITs is more like shares than it is like land investment. That doesn’t mean you don’t have other options. We are coming to them shortly.
I have a house
I have property exposure in the UK anyway via real bricks and mortar. If I think about how much equity is in my property compared to how much I have in other investments, I am already over exposed to property.
Like many people, I don’t sell because I don’t want to realize the capital gains because as an expat I would be heavily taxed on them. On top of that, like my friend, I feel uncomfortable stepping off the housing ladder.
But there’s a big difference between me and my friend. His property exposure was through his own house. Mine is through investment property aka buy to let (BTL).
My recommendation to my friend was this.
In his position I’d sick all my money in a global index fund. For the reasons outlined above, I think that will give you all the property exposure you are ever going to need.
But, if you aren’t prepared to do that and it has to be focused on property, then go for the real thing.
Yes, BTL requires a little work on your behalf, but unless you are very lucky you’ll make better returns than you would do in the stock market. But most importantly in this case, you’ll have exposure to UK property as part of the deal.
Of course, he doesn’t want any hassle. The idea of simply putting all his money in a property fund and then being able to get on with the rest of his life is appealing. He’s all for simplicity.
Simplicity
And on that note. I totally agree.
The tried and tested method for growing your wealth is via stocks and bonds. Either one fund containing both or one of each.
A dedicated property fund means adding extra complexity to your investment portfolio, which in turn means extra work when purchasing and rebalancing.
99 times out of 100 you will be served best by simply investing in a couple of index funds. One for stocks and one for bonds (Remembering that the stock fund contains all the property exposure you are ever going to need).
Tax
Another key issue I have with IUKP is tax. One of the ‘so called’ benefits of a property fund is income. You get your share of all that lovely rental income in the form of regular dividend payments.
What’s not to like about that? Well, where to begin:
- A company paying out a dividend suggests there’s no growth on the horizon for that company otherwise they’d be reinvesting the money into that business. As an example, most of the big tech companies don’t pay dividends.
- When a dividend gets paid out the value of that company is reduced by the price of that dividend.
- Dividends are subject to Mr HMRC aka the tax man.
I want to avoid the tax that I may have to pay on dividends. Dividend payouts on property funds and REITs are usually higher than stocks, because REITs must return 90 percent of their income to investors.
Unless you have your property fund tucked away in an ISA or similar you probably want to avoid that if tax is an issue.
And let’s face it, for most people, it is.
Diversification
Diversification is a hot topic in investing. The idea that you don’t put all your eggs in one basket. Harry Markowitz, Nobel-Winning Pioneer of Modern Portfolio Theory famously said that diversification is the only free lunch in investing.
Diversification is the only free lunch in investing.
Harry Markowitz
Whilst I have to admit that IUKP spreads your money over lots of different types of property and related businesses throughout the UK, why stop there in this day and age.
If I was going to invest in a property fund, rather than investing in something UK focused like IUKP, I’d invest in a global fund.
The global version of IUKP is iShares Developed Markets Property Yield UCITS ETF (IWDP).
You’ll have property working for you globally while you sleep. The only problem with that fund is its expensive with an OCF of 0.59%.
Some cheaper options that you may want to look at are:
- VanEck Global Real Estate ETF (TREG) OCF 0.25%
- Amundi ETF FTSE EPRA/NAREIT Global ETF (EPRA) OCF 0.24%
I can hear the naysayers already pointing out that wouldn’t get you the dedicated UK property market exposure desired.
To which I’d reply. True but neither will IUKP. Let me explain.
At the end of day, IUKP is full of commercial property. Think hotels, logistics hubs, data centers, which is good in a diversification respect, but perhaps not so much if you think about all the deserted shopping centers and offices that will also be lurking in there.
Not to mention the fact, you won’t be focused on the UK residential property market anyway.
If you insist on wanting to do that, then perhaps you might want to look for one of the larger residential REIT ETFs. Examples being:
- Grainger PLC (GRI.L)
- The PRS REIT PLC (PRSR.L)
You’ll be focused on UK residential property if you buy shares in either of those.
Money
If you are familiar with index funds and ETFs you may have flinched at that 0.59% OCF because that ain’t cheap in this day and age. Luckily IUKP is a little cheaper, but not much, which brings us to our next issue.
Property funds tend to be expensive relative to standard index funds. For example, IUKP has a total expense ratio of 0.40% compared to just 0.07% for iShares Core FTSE 100 UCITS ETF (ISF).
Back to broad based index funds and ETFs then. These just make a lot more sense for most people.
The Case For Investing
Having said all that, my friend still wanted to invest in IUKP anyway, and I’ve no problem with that. Just because it isn’t right for me, doesn’t mean it isn’t right for him. Here’s his response to my reasons:
Equity (stock) index funds are exposed to enough property – That maybe the case, but they still don’t completely correlate. Sometimes property funds go up and down at the same time as equity funds and sometimes they don’t. Because of this, you can reduce volatility by adding REITs or property funds to your portfolio.
I have a house – He won’t have a house in the UK (after he’s sold his).
Simplicity – A bit of complexity is worth it if you get what you want.
Tax – He will put his IUKP investments in a tax sheltered ISA.
Diversification – The whole point of adding IUKP is to maintain some exposure to the UK property market, so investing in a global fund wouldn’t provide the same benefits.
Money – Sure, 0.40% isn’t as low as 0.07% but it’s not going to make or break his investments.
The bottom line
So there you have it, some reasons for and against investing in IUKP or property funds in general.
Did I mention the fact iShares have recently come out with their own alternative to IUKP?
