British Expat Money

UK Residential Property ETF – Your Options!

james@britishexpatmoney

Let me start by getting the elephant out of the room. At this moment in time there ain’t no UK residential property ETF. But that doesn’t mean you don’t have options.

In fact you have lots of good alternatives that should fulfill your needs. Here are the main ones:

Let’s get into it.

UK Property ETFs

So let’s start with UK property Exchange Traded Funds (ETFs). There are two options. Both from iShares and both with an ongoing charges figure (OCF) of 0.4%.

You can read a bit more about them here if you are interested, but the crux of the matter is, though they contain residential property, they certainly aren’t filled with it. At the time of writing, iShares UK Property ETF has about 9% and iShares MSCI Target Real Estate has about 5%.

The remainder of the funds are allocated to other types of property like Health Care, Industrial, Offices and Retail.

On the one hand you are going to have lots of stuff in there that isn’t very good. Think deserted shopping centers and offices.

On the other hand you’ll have things like data centers and logistics hubs that are going great guns at the moment.

Unless you specifically absolutely only want residential property exposure these ETFs really could make sense.

Spreading your money over different types of property both commercial and residential seems like a much safer strategy than focusing purely on residential.

Going Global

And, if the idea of moving away from residential and towards commercial doesn’t put you off, another option you have, is global property.

Instead of focusing on the UK, your money will be spread across the globe. At the time of writing, just under 5% of the fund is allocated to the UK.

Instead of focusing on residential property, your money will be spread across property types. At the time of writing, just under 15% of the fund is allocated to the residential sector.

Here’s some examples you could have a look at.

It might not have escaped your notice that two of the three have lower OCFs than the iShares UK options. In other words, you may save money by opting for one of these.

Individual REITS

If you are hellbent on UK housing then you could invest directly in a stand alone Residential Real Estate Investment Trust (REIT).

These are companies that hold lots of residential properties across the UK. You can buy them directly on the stock exchange in just the same way you buy ETFs.

For pure residential UK property, the best examples are probably these two:

But there are some others that may work, depending on your exact requirements. All are less well known, but do focus on residential, although some of them do that through social housing.

You would think the drivers of investment performance would be similar for social housing, though.

Individual Companies

The next option you have is investing in individual companies. There are loads of these to choose from. Here are the big ones:

But, for the inexperienced out there, just know that when you choose individual companies you are taking on more risk than with a fund.

Don’t put your eggs in one basket and all that!

That said, the big UK housebuilders have been going for a long time and they don’t’ just work on one development at a time.

In just the same way REITs aren’t going to own a single property, house builders aren’t likely to just have one project going on.

The ones on stock exchanges that you can invest in certainly aren’t anyway, so you’d think if one project ran in to trouble there’d be another one to fall back on.

Nevertheless, they can still run into trouble and bankruptcy is a real risk. There are times in the not too distant past when house builders got hit hard like the 2008 financial crisis and the more recent 2020 Covid-19 Pandemic.

The stock price of individual shares really can go to zero! So I’m sure it goes without saying that a little work on your behalf before investing in a single house builder wouldn’t go amiss.

Real Residential Investment Property – aka Buy to Let (BTL)

Though you’d think residential property companies would give you similar exposure to the housing market as you get with BTL that doesn’t necessarily hold true.

You see, there is a school of thought out there that property investment is all about land. (That’s why you get everyone talking about the 18 year property cycle).

Now property funds and companies sound perfect for the job. Exposure to real estate without the hassle. Simply buy some shares and collect rent without having to get up in the middle of the night to fix a toilet. Perfecto!

The problem is reality is a bit different.

Past data seems to show that property focused funds are more likely to follow the wider stock market than the residential property market. Have a look at the graph below which compares US property funds against the wider stock market.

Source: Portfolio Visualizer

Whilst they aren’t perfectly aligned, they aren’t far off. As for individual companies. Well, that’s anybodies guess.

But I think its safe to assume when when there’s a wider stock market crash, property funds and companies are going down too. Oftentimes much harder much faster!

It’s no surprise when you think about it because whilst land is a different beast to shares, we aren’t really talking about land investment with these property companies. Let me explain.

Funds vs land

Stick a building on some land and you get a bit closer to stocks and 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 property companies are more like other businesses than they are like land.

Enter stage left a little something called buy to let.

BTL

I’m sure, it goes without saying that BTL gives you actual, real, authentic exposure to the UK residential property market.

Let’s face it. There’s nothing better.

Not only that, but Mr Average is nearly always going to get better returns than stocks and shares for the simple reason you can use a mortgage.

Sometimes called leverage, other times gearing, but I prefer juicing.

You see when you use outside money to buy property you get better investment returns. There’s no way around it. It’s in the maths. Here’s a quick example:

(Whilst fees associated with buying a house mean you wouldn’t get every single penny of that, you will definitely get a bigger chunk).

Of course in the short term that could work in reverse, but as long as you don’t take on more debt than you can handle and speak with a good mortgage broker you should be fine. Most people seem to manage it.

And by the way, lenders are prepared to give you money to buy property because it is considered to be one of the safest investments out there.

But I can here the naysayers pointing to the big elephant in the room: Houses cost money. A lot of it.

How much money do you need to invest in buy to let?

The UK media likes to dwell on average house prices, which are round about £300K at the moment, but here’s the thing.

Average doesn’t usually tell the whole story. UK property is no exception.

You see. Those for starters those numbers are pushed up by the capital. Head northwards and you are looking at an average of more like £200K. Edge east and they drop again to around £150K.

But hey, the fact of the matter is, you don’t need to buy the average house anyway. Just about every single one of the major cities outside London has decent property priced below £100K.

And remember, we’ve already established property investment only works to perfection with a mortgage.

Buy a £100K house with a £75K mortgage and you only need to find £25K. Buy it with your friend and that’s £12.5. A group of four equates to just over £6K a piece.

Still too much? A quick look on Rightmove shows loads of properties below £10K.

Will a £10K property make a good BTL? Probably not, but I bet you can find something half decent for under £50K if you put the work in.

I’m just saying……………

We’ve compared property investment to shares here if you are interested, but I think the key is this. Most people, most of the time will get better investment returns from real property. But you will have more work to do.

The Bottom Line

So while there’s no UK residential property ETF per se, that doesn’t mean you don’t have options. I think there are five key alternatives that just might tick the right boxes.

The chances of a large UK house builder going bankrupt is probably relatively small, but that’s not to say they won’t run into trouble. At some point, they probably will, and investors who are unlucky enough to own them at that time could loose a lot of money.

A long term time horizon will lesson this risk, because in all likelihood over time the peaks and troughs of individual shares are likely to get ironed out, but that’s not set in stone by any means.

That’s just to say, if you venture down that path, you need to do your research and pick the right one (or two or three…).

In general REITs will lessen that risk and ETFs just about remove the risk entirely over a long term time period. That would be especially true if you opted for one of that goes global.

In other words even though these ETFs contain other types of property, that’s going to be a good thing for most investors. Investing in different property types is safer because it spreads risk. If one year residential struggles, the losses may be counterbalanced by gains in other sectors such as health care.

Sure, office space and retail is struggling at the moment but then again you are probably getting it at bargain prices within the fund.

That said, those that are dead set on residential property and are not afraid of a little due diligence could invest in real property.

Yes, you need a bit more money up front and yes you’ll have more work to do (as least compared to the big ETFs. Researching individual companies is another story), but there are big benefits with the real thing.

  1. You get pure exposure to the UK residential property market
  2. You’ll likely get better investment returns
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