Virtually all property funds in the UK invest solely in commercial property (offices, retail and industrial). The fund managers who invest in these properties are mostly the large institutional investors such as insurance companies, pensions providers and investment companies.

Purely comparing past performance REITS have a better track record than property OEICs as you can clearly see from the two graphs below.

 

 

 

So why is this?

 

Well, each of these two fund structures (REIT and OEIC) is fundamentally different.

 

An OEIC is an open-ended investment company.  Such a fund has to sell its underlying assets when withdrawals are made from the fund and units are cancelled.  So, property unit trusts tend to have fairly high cash balances to meet withdrawals requests because it is impossible to sell properties immediately.

 

On the other hand, a REIT (Real Estate Investment Trust) does not need to sell its underlying assets when the investor sells shares.  Shares do not get cancelled.  Ownership of the shares simply transfers from one shareholder to another.  As a result a REIT invests much more of its money into properties.

 

 

REITs generally invest in more modern properties than traditional property OEICs and they usually have higher quality tenants so investment in modern buildings such as data centres, energy centres, warehouses and serviced offices is more typical.  Property OEICs on the other hand tend to invest in older, less modern buildings and have more traditional or old-fashioned businesses as tenants.

 

 

A big disadvantage of property OEICS is their lack of liquidity.  When there is a stock market panic and a large demand for cash withdrawals, sometimes such funds get closed down temporarily by the regulator because there are insufficient funds to pay to investors.  These temporary closures can be for a few weeks but sometimes they are for a few months or even longer.  This can be a real issue for an investor who needs the cash soon.

 

In spite of their much superior investment performance, REITs prices are much more volatile because these funds behave very much like equities (shares) especially when they are invested in tech buildings such as data centres.  So, some investors will be uncomfortable about the higher volatility compared to property OEICs.

 

So, when deciding which type of property fund to invest in do take account of these advantages and disadvantages of each type of property fund and buy the one that most suits your risk profile. You know it makes sense. *

 

 

*RISK WARNING

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. The Financial Conduct Authority does not regulate tax planning, estate planning, or trusts.  This blog is based on my own observations and opinions.