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Property investments have taken a pounding over the past year. Confidence in bricks and mortar has slumped and the property market come to a juddering halt. As a result, funds that invest in property have lost nearly a quarter of their value over the past 12 months.

However, far from being downhearted some professionals are rubbing their hands with glee.

Michael Holt, who has been buying residential property for private investors for more than a decade through his firm Charterhouse Standard Holdings, says: “Even if the market continues to struggle in the near term, invest for five or 10 years and you will almost certainly make a healthy profit.”

Many experts still urge caution. Rob Harley at Bestinvest, an independent financial adviser, says: “We think property prices will be sluggish for some time.”

However, past experience shows that intrepid investors often make a killing by going against the herd.

If you are feeling brave, investing directly in bricks and mortar may be a step too far. But there are alternatives.

Kate Faulkner, author of The Property Investor’s Handbook, says: “Property investments are a cheap way to get exposure to a diverse portfolio and a lot less hassle than doing it yourself.” But which are the best investments and what are the dangers?

Property unit trusts

The most popular way of investing in property. Several dozen investment funds pool their investors’ money and put it into offices, shops and other commercial property.

Commercial property funds have fallen by about 21% in the past year.

Most advisers do not recommend investing at the moment — they expect other investments to perform better as the market recovers.

Verdict: There are better ways to profit from a bounce in the market.

Investment trusts

Like unit trusts these funds pool investors’ money to buy a portfolio of commercial properties. However, investment trusts are companies quoted on the stock market, with shares that can be bought and sold.

An investment trust’s share price depends not just on the value of its assets but also demand for its shares.

If shares can be bought for less than the value of the underlying assets it is said to be trading at a discount. The recent stock market downturn has seen some funds priced at discounts of 20% or more. In other words, you can buy £1 of assets for just 80p.

Some advisers think trusts now look so cheap they are a definite buy.

Chris Hills, chief investment officer at Rensburg Sheppards Investment Management, recommends TR Property and also F&C’s property trust, which pays an attractive dividend yield, or income, of 6%.

Verdict: Looking very cheap and the advisers preferred way to get into the commercial property market.

Bonds

Investors can access commercial property through bonds sold by insurers. However, returns from bonds are treated as income so higher-rate taxpayers pay 40% and those on the basic rate 20%.

With unit and investment trusts, returns are treated as capital gains and from April investors will pay a flat rate of 18%. Unit and investment trusts can be held in an Isa, making the gains completely tax-free.

Brian Dennehy at Dennehy Weller, a financial adviser, says: “People who want to invest in property shouldn’t do it using a bond.”

Verdict: Not tax efficient.

Reits

Real-estate investment trusts (Reits) pool investors’ assets in a portfolio of properties, mostly commercial. Investors are able to reclaim tax they would normally pay on dividends if they invest in a Reit via a pension or an Isa. However, the average Reit has fallen by 31% over the past year (see graph). Investment professionals are divided on Reits: some believe that, after such a pounding, now could be the time to buy at bargain prices. Others think their poor performance will continue for some time.

Verdict: Good value, but more volatile than property funds.

Regional funds

These schemes are focused on specialist areas of the residential property market and frequently promise double-digit returns. They often require a big initial investment, have high fees and may tie up your money for several years.

The Prime London Capital fund is one of the more accessible schemes. Managed by estate agent Douglas & Gordon, it invests in top-end London property, requires a minimum investment of £10,000, has an initial charge of 5% and an annual management charge of 1.75%.

Verdict: For the experienced investor.

Index funds

It is possible to invest in accounts where your capital is guaranteed and returns are linked to any rise in the Halifax House Price Index. Your capital is guaranteed as long as you tie your money up for the term of the account, usually five years. If the index falls, you get back your money, but no interest. At present, no such schemes are open for new money.

Verdict: Safe, but don’t expect huge returns.

Overseas opportunities

Many fund managers believe there are opportunities in overseas property. Fidelity, First State and New Star, among others, have launched funds giving investors access to this market.

However, many of these companies still have exposure to UK property and have suffered over the past year.

Numerous smaller funds exist, targeting specific regions. Mick Gilligan at Killik, a stockbroker, recommends a stake in China Real Estate Opportunities, a fund that invests in Chinese property development. While western property markets are stumbling the outlook for China is good, with office vacancies at a record low and strong rental growth.

Verdict: Moving overseas could result in better than average profits.

The Riet stuff

STEPHEN and Sarah Duncan-Brown, left, from Lee-on-the-Solent, in Hampshire, have taken advantage of the slump in the market to buy back into property at “bargain prices”. The couple, who are retired, have even invested a nest egg for their granddaughter Zoe, 18 months.

The Duncan-Browns invested several thousand pounds in the real-estate investment trust (Reit) Land Securities.

Its share price has dropped 23% over the past year, which they think makes it look like outstanding value.

Stephen, 60, said: “I prefer Reits because they are easy to trade in and out of and give you exposure to a wide range of properties.

I’m confident that its share price will bounce back — so confident in fact that it is the first investment we have made on behalf of Zoe.”

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