Buy-to-let property investment and unit trusts
Sean Johnston, general manager of property portfolio planning at IGrow, discusses the differences between these unit trusts & buy-to-let property.
For many investors, unit trusts are a viable form of investment. How does it compare with buy-to-let property? GRAPHIC: Amber Dawson.
Unit trusts have been growing in popularity. According to the Association for Savings and Investment South Africa (ASISA), the collective investment scheme industry in South Africa received net inflows of R213bn last year, the highest in its 55-year history.
Furthermore, four of the top 10 funds in South Africa by net inflows are in the ASISA interest-bearing short-term category, according to data from Morningstar.
According to Johnston, there are several reasons why unit trusts are growing in popularity. This type of investment can mainly be easily accessed without any lock-in periods or fees for withdrawing funds.
Yet, despite this sudden surge in popularity, how does this form of investment compare to buy-to-let property? Some unit trusts do invest part of their funds in property. But could buy-to-let property be a safer more lucrative investment?
More capital, larger funding
One key characteristic of buy-to-let property investing is that a bank can finance the investor’s starting capital.
For unit trusts however, it is highly unlikely that an investor will receive this level of funding to start their investment.
“When you apply for a home loan, the banks see property as an appreciating asset rather than an asset that has potential volatility such as a unit trust,” Johnston explains.
A unit trust, also known as collective investment schemes, is an alternate, less-volatile investment option compared to shares according to Sean Johnston, general manager of property portfolio planning at IGrow. SOURCE: Allan Gray. GRAPHIC: Jordan Wright.
Although property prices can fluctuate, the banks can predict these trends more easily, which makes property a more reliable investment.
“Property prices are based on the supply of properties in a location and the demand for people to want to live in these properties. The supply and demand are more easily measured and banks can rely on properties to maintain their value,” he explains.
This has significant implications on the investor, who could access substantial capital if they decide to invest in buy-to-let property.
Unit trusts – Fees and interest
Although some unit trusts may invest in property, their investors never own any of the underlying assets, Johnston says.
“An investor in a unit trust merely owns units in a fund that invests in a company on their behalf. The investor does not own any assets in the company but achieves interest if the company performs well,” he clarifies.
He further adds that a buy-to-let property investor is purchasing a tangible asset, and not an investment statement.
In addition, some unit trusts require their investors to pay a variety of fees which could eat into their profits.
Graph illustrating the total assets and net inflow for collective investment schemes since 2016. Also, note the number of portfolios which have been on the rise since 2018. GRAPH AND SOURCE: ASISA.
“[Some] unit trust funds have fees such as Total Expense Ratio (TER), Linked Investment Service Provider (LISP), and upfront and or ongoing advisory fees. Some asset managers also charge performance fees if they outperform their specific benchmark,” he explains.
As a result, these fees can “eat into investment returns”, especially if the trust is not performing well, says Johnston.
In need of cash
Criticisers of buy-to-let property investors have often argued that this investment vehicle lacks diversity and liquidity in times of crisis.
In turn, Johnston argues that a diligent investor should always have capital in their investment portfolio readily available in case of an emergency.
“An investor should diversify their portfolio to include capital that can be accessed in an emergency as well as other investments apart from property,” he says.
In addition, although unit trusts are fairly liquid investments, they are also subject to capital gains tax. On the contrary, a diligent investor can use a variety of methods to access cash in a buy-to-let property investment scenario without paying capital gains tax, says Johnston.
“The easiest way to access the money in a property is by making use of the access bond facility and withdrawing funds from the bond account if necessary,” he recommends.
At IGrow we have a number of trained experts who are here to start your buy-to-let property investment journey. Click on the link here, and book a free consultation to start your journey with us today.