Thinking of investing in buy-to-let? Consider this property ETF as well!

Key points

• Buy-to-let property can offer both rental income and capital appreciation
• A real estate ETF can provide access to different sectors of the property market
• Both investments have pros and cons, but there can be room for both assets in a portfolio
  

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Many investors consider property as one of the safest investments over the long term. Investing in property, such as buy-to-let, certainly seems attractive.

Real estate can provide stable revenue flows through rental income as well as the potential for capital appreciation. However, it’s not all plain sailing. Mortgages, maintenance costs, and other expenses can all chip away at the return.

A property ETF 

Another option I’ve been considering is a real estate ETF (exchange-traded fund). ETFs are funds that track an index or sector and can be bought and sold like a share through most online brokers. 

The one I’ve been looking at is iShares UK Property UCITS ETF GBP DIST (LSE: IUKP). This ETF aims to provide diversified exposure to UK real estate by tracking the FTSE EPRA/Nareit UK Index. The index is designed to track the performance of real estate companies and real estate investment trusts (REITs) listed on the London Stock Exchange. 

It’s a decent size, with over £600m in assets, has a relatively low ongoing charge, and has been going since 2007. No wonder it’s one of the most popular ETFs for UK investors.

The fund is also well-diversified, holding the 40 companies listed in the index. These operate in a wide variety of sectors including industrial, residential, and healthcare. 

Out of the 40 firms, the largest holding is Segro at just over 20%. This specialises in out-of-town business space and is one of the biggest industrial property companies in Europe. Well-known names such as Land Securities Group and British Land are also in the fund, as is the largest UK operator of purpose-built student housing, The Unite Group. 

The current dividend is 1.96% and perhaps this is the biggest drawback of the fund. UK residential buy-to-let returns currently sit much higher in the region of 5%. Additionally, over 10 years, the average house price has increased by over 40% whereas this ETF has increased by around 10%. Over this period, by my calculations, an investment into bricks and mortar would have been more profitable.

Is buy-to-let better?

Despite this, there are three reasons why I’m still interested. First, UK house prices have had a fantastic price increase over the last 10 years, but there’s no reason to think that this will last forever. Second, there are 40 companies in the fund from a wide variety of property areas. Not only does this offer me more diversification than a buy-to-let, but some of these sectors have very high barrier to entry costs, which can be difficult to overcome as an individual investor. Finally, since I can buy and sell this ETF like a share, it provides access to UK property investment in a liquid way.

On balance, I think there’s room in my portfolio for both buy-to-let property and this ETF. Therefore, I’m going to seriously consider adding iShares UK Property UCITS ETF GBP DIST to my holdings.