Our Chairman, Damian Collins, unpacks diversified property funds – how they work, the premise behind them, and whether they could fit into your portfolio.
We’ve all come across the expression ‘don’t put all your eggs in one basket’. Yes, it’s a cliché but it neatly sums up the need to diversify – in other words, spreading your money across a variety of investments to smooth out returns, lower volatility and reduce risk.
Many investors know that diversification can be achieved by building a portfolio of investments spanning each of the major asset classes – cash, fixed interest, property and shares.
It’s possible – and desirable – to take diversification further. For instance, you may want exposure to commercial as well as residential property within your portfolio.
But even within this, investors can achieve diversification within specific products. That’s exactly what diversified property funds are all about.
How diversified property funds work
For those new to property funds as an investment vehicle, funds allow investors to share in the returns of large-scale properties such as multi-unit residential developments and commercial assets.
In this case, I’m going to talk about commercial property funds specifically.
These funds can hold a single property, or they can invest in multiple assets. Along with regular distributions generated by the rental income from these assets, investors can also share in the capital growth if the underlying properties are sold at a profit.
What distinguishes ‘diversified’ property funds is that they invest in several properties spanning different sectors, geographic areas and even different types of tenants.
What are the advantages of a diversified fund?
The motive behind this diversity is that it spreads risk. For instance, a diversified commercial fund may hold industrial properties such as a warehouse complex, as well as retail assets like a suburban shopping centre. In this way, the fund isn’t 100% exposed to the fortunes of either the industrial or retail markets.
That same fund will also have a mix of tenants. This could be a blend of multinational or publicly-listed companies, as well as small specialist enterprises like local medical centres.
Again, this diversity brings benefits. Each tenant will have their own income stream. So, while a change in one sector of the economy may affect some tenants, it’s possible it won’t affect all of them. This helps protect the fund’s rental stream – and by extension, the regular distributions paid to investors.
Managing diversity of leases
It’s not just the tenant mix that makes diversified funds attractive.
A skilled fund manager will proactively manage the fund’s leases and asset profiles.
For instance, while long leases are often an attractive foundation for diversified funds from an income standpoint, assets with shorter leases can also provide repositioning potential through the opportunity to make improvements and renegotiate lease agreements to position the property in a higher rental return bracket.
Creating the right balance of these assets can help the fund deliver on a growth as well as an income basis, while ensuring the leases don’t all end at the same time which helps to underpin greater cashflow security.
Is a diversified fund right for your portfolio?
The beauty of a diversified property fund is that it can have something for everyone.
Commercial property is renowned for its solid rental returns, so a diversified fund can absolutely be a source of regular income, often with distributions paid monthly in line with property rents.
The mix of properties can also lend itself to capital gains if one or more of the fund’s properties are sold at a profit.
The key is to take a close look at the fund’s goals, and the mix of properties it holds or is aiming to buy. This can allow you to determine if the fund suits your personal aims. As a means of adding diversity, however, a diversified fund can tick plenty of boxes for your portfolio.
Interested in investing in a diversified property fund? Take a look at our latest diversified investment opportunity – the Westbridge Diversified Fund No.4.
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