Invest in property shares or real property?

To invest in property shares or real property, that is the question!

Have you ever wondered how property funds compare to real house prices? Today, I compare property funds, both residential and commercial, with real house prices. I’ve also thrown in the stock market for good measure.

When you are thinking about whether to invest in property shares or real property it is worth understanding how these investments relate to one another.

If they behave in exactly the same way and go up by the same amount you might as well just invest in the cheapest one.

However, if they behave differently it might be worth investing in more than one of these assets. This is because it will help diversify your investment portfolio.

For this comparison I have used data from the following funds and indices:

Residential Property Fund
Grainger (GRI) which invests in lots of residential lettings predominantly in the UK.

Commercial Property Fund
iShares UK Property UCITS ETF (IUKP) which is an exchange traded fund. IUKP aims to track the performance of the FTSE EPRA/NAREIT UK Index. It offers exposure to UK listed real estate companies and real estate investment trusts. The fund is mainly focused on commercial property.

Residential Property Index
The average price of UK properties as given by The UK House Price Index. This index uses sales data collected on residential housing transactions, whether for cash or with a mortgage.

Stock Market Index
The FTSE100 Index which is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange.

The values have been adjusted so that they all have the same starting point to give an idea of how they correlate with one another.

This isn’t going to be the most robust or scientific method, but I think it gives a good idea of how these different investments correlate with one another.

The graph below looks at how they have correlated from 2010 until 2018.

The mere fact that all the investments are all on an upward trend suggests that over the long term there is definitely some correlation there.

However, most investments go up over time and over the short term the situation is a little different. In fact, without doubt they behave differently when the time horizon is reduced.

Based on price increase over the eight years you’d want to invest in property shares. The residential and commercial property funds certainly look like they’ve been better investments over the eight years.

But don’t be misled into thinking that is always the case. Sometimes it might not be a good idea to invest in property shares.

If I go back a bit further to say just before the financial crisis things look a little different. Maybe, you wouldn’t want to invest in property shares at all.

The graph below looks at how they have correlated from 2007 until 2018.

Those same funds that out performed over the last eight years, wouldn’t have outperformed if you’d invested in them a bit earlier. They took too much of a hit in the credit crisis and haven’t recovered yet.

Over a longer time period residential property looks like a clear winner. Though real property and stocks both went down during the financial crisis, they are both up on where they were. The property funds look like they have a long time yet to recover.

Not only has residential property out performed the other investments, it has done so with less volatility. On top of that investors could have magnified their returns through leverage by taking out a mortgage.

Not to mention the fact that if their investments were buy to let, the rental returns would likely be greater than the dividend payouts from any of the funds.

That said, I’m not saying to invest in property shares would be a bad thing to do. I’m not saying that real property definitely beats the other investments either.

This analysis assumes you put all your money in at the beginning of the period and left it there. If you dollar cost averaged you’d probably be well in green by now.

The very fact that property funds behave differently to the wider market means they have diversification qualities.

On top that, the notion of return to the mean suggests something that has underperformed for the previous period may outperform the next. If property funds did badly before, they may do well in the future.

Though real property looks like the best bet over the time period, there are advantages to investing in property funds or the wider stock market.

I should also point out that the house price index used for this comparison is an average of all properties in all locations.

A one bedroom apartment in central London will probably behave a bit differently to a four bedroom semi-detached in Birmingham. Both in terms of rental yield and capital gains.

I’m pretty sure some kinds of properties in some areas went down in value a lot more than average during the financial crisis.

In fact, I’m sure some people will read this and think I lost a lot of money in 2008. I’d rather invest in property shares thanks very much!

When all said and done I think the data shows that these investments do show a level of negative correlation that may be useful for increasing diversification in your investment portfolio.