So it's something of an anomaly that there are no mainstream funds that offer private investors indirect exposure to housing. A handful of small vehicles do exist, but they typically invest only in the prime West-London niche, where flats are let to tenants on corporate housing allowances. They also tend to be pitched at so-called 'sophisticated' investors, with fixed investment lives and £50,000 investment minimums - the kind of structure usually reserved for stamps or fine wine.
Cue Hearthstone Investments and Castle Trust, two start-ups that have spotted the apparent market gap and are in the process of launching mass-market residential property investment vehicles. Hearthstone already has the Financial Services Authority's permission to launch an open-ended fund - a first for housing - whereas Castle Trust is still waiting for the regulator's approval for a fixed-return product based on the Halifax house-price index.
How useful will these be? The companies think their clients will fall into one of two camps. On the one hand are those that want a hedge against strong house price inflation while they rent, such as first-time buyers saving for a deposit or professionals who sell up and move abroad for work. On the other hand are investors who include housing as an 'alternative asset' in a diverse portfolio, just as they might also buy into commercial property or commodities.
The first group is an intriguing one because it applies to no other asset class. There are other alternative assets that double as consumption goods - art, vintage cars and the like. But I can think of none that qualifies as a necessity so fundamental that consumers need to maintain their exposure to it for fear of being priced out of a rising market. Chris Down, chief executive of Hearthstone, takes this logic to its conclusion by arguing that most people are underexposed to housing because their housing needs grow over their lifetime.
Perhaps. But the argument falls down in presupposing that individuals have no control over the timing of their house purchases. If they buy or trade up when the market falls - rather than simply when they have another child - the hedge becomes a hindrance.
This point boils down to whether homeowners are investors or simply consumers, which is also central to the question of diversification. Are investors who buy into residential property diversifying their portfolio, because it is an asset with relatively low correlation to equities or bonds? Or are they in fact increasing their exposure to an asset class they already own in abundance in the form of their home?
True, most homeowners don't sell up if they think the market will fall - suggesting they treat their home as a consumption asset, not an investment asset. But there are exceptions: a sell-side property analyst I know sold his flat in 2008 because he saw the market falling (he's still renting). And most homeowners are reluctant to sell in a weak market, just as they would be reluctant to sell equities after a market crash. So homes seem to become investment assets in certain circumstances - most obviously when owners first buy or trade down in retirement, but also at other times. Sadly, that doesn't fit neatly with portfolio theory.
However, if we leave aside this interesting debate and assume an investment in housing is a sensible diversifier after all, another question arises - why buy a fund rather than a house? After all, part of the appeal of houses is their very detachment from the City investment machine. They are tangible assets over which an investor can exert direct control. That sounds like an emotional and therefore suspect reason to invest in something. But at a time when counterparty risk has emerged as a reality and the relationship between shareholders and managers has never been more fractious, it is rational. The same logic applies to physical gold.
Of course, counterparty risk is greatly reduced when you buy a fund that is backed by physical property - most investors are content to own a physical gold ETF rather than keep bars in their cellar. In this respect Hearthstone's fund is the safer option, because the Castle Trust product is backed by the company's own balance sheet rather than by a portfolio of assets. And there are plenty of advantages to buying a fund rather than a house. Funds are by nature well diversified, whereas buy-to-let investments are typically geared plays on a single asset. Most importantly, with all buying and management activity outsourced, owning a fund involves no work. There's clearly a place for that.
Perhaps the greatest drawback to these indirect housing investments is that they don't offer much income. The Hearthstone fund will only yield 2.5-3 per cent after property and investment management fees, whereas your average buy-to-let investment yields 4.1 per cent net, according to Savills - and nearer 6 per cent if you manage it yourself, as many private investors do. Less work translates into lower returns.
That leaves investors more reliant on capital gains - ie, rising house prices. To what degree these can continue their strong run since the 1960s is a question for another week. But a regular, compounded income is the best hedge against an uncertain future investors have yet found. Counting on house prices for returns can seem like trying to catch the proverbial birds in the bush.
