M&G, Threadneedle, F&C and Freehold have made the cut in independent ratings and research company, FE’s first ever property list to sit within its FE Invest Approved List (formerly the Select 100 list).

Having already added Ethical funds to the Approved List earlier this year, FE has now taken the step to add four property funds to the mix.

M&G Property Portfolio, Threadneedle UK Property fund, F&C UK Property fund and the Freehold Income Trust all made the cut.

The addition of the funds mark the first time FE has included physical property funds alongside equity property funds.

Previously physical property had been excluded from the Approved shortlist due to difficulties in rating them using a pure quantitative approach – which was a main reason for stopping FE Crown Ratings being awarded to the asset class last year.

The difficulties with the asset class primarily stem from issues regarding the use of appraised values which can greatly distort the performance and behaviour of the funds. To combat this the FE Research property recommendation is based on the income that the fund produces over and above the capital appreciation as this, in our opinion, is more stable, measurable and is the most attractive characteristic of the asset class.

To identify the funds for selection the Property sector is initially filtered down to exclude non-physical property funds, institutional funds and any funds with less than a three year track record.

The income-based selection process is built around three components.

The first component is a quantitative analysis of past income and its stability over time.

The second component is more qualitative and is intended to assess the income distribution on a forward-looking basis. It takes some characteristics of the portfolio into account, such as average lease length or tenants’ risk rating, to form an opinion on the potential risks weighing on the rental distribution growth.

The third component has to do with the fund’s structure.

Each fund then goes through a rigorous qualitative assessment before making the final list.

The four funds that made the shortlist stood out 'due to their income track record right from the start and we believe their different investment processes make this repeatable' - according to analysts at FE Research.