Property – an investment with solid foundations?
November 2009
Property has always been a popular investment because it is a tangible and useful asset.
Across the UK, homes lost on average 13.5 per cent of their value from August 2008 to August 2009, according to the Department for Communities and Local Government (CLG). This is an average of the four different house price indices, specifically CLG, Land Registry, Halifax and Nationwide.
Despite this, buying a house is still an important priority for most people. When the property market takes a tumble however, you might be unable to sell your precious bricks and mortar in a hurry but remember unless you are buying a property purely for investment you still need somewhere to live.
A lot of people who want to invest in property and don’t want to be “stuck” with residential property choose to invest in commercial property through savings vehicles such as investment and unit trusts and real estate investment trusts (REITS) and some can now form part of an ISA investment – it’s worth remembering that these funds can prove highly illiquid at times and carry some risk, so always seek professional advice.
Direct property investment
Direct investment in property essentially involves buying a property outright (if you can afford it) or taking a mortgage on a property in order to sell it on at a later date for a profit. Most property can be bought this way in order to let out, providing you with a rental income. Recently mortgages to buy investment property have become harder to get without a substantial deposit so it may be difficult to get finance, so always seek advice.
If you are considering property purely to resell it at a profit or to let it, then tax implications may affect the “returns”. Make sure you seek advice before buying a property to let.
There are other potential pitfalls that need to be considered, as a landlord including certain legal obligations to your tenants, which could involve the added cost of additional maintenance work. There is also the added hassle of generally managing both your property and the tenants.
In general, then, direct property investment might provide you with returns above those you might expect from a savings account, however it requires a lot of “hands-on” management.
As with all investments, there is no guarantee that we will see the house price growth of early this century repeated. Not only has the recent credit squeeze quelled rising prices, some analysts have warned that continuing price falls are on the horizon. The longer-term health of the property market is far from certain.
Indirect property investment
If you are attracted to potential returns in the property market but don’t want to take on the responsibility of managing properties of your own then indirect property investment, through property investment funds, may be an option. In their simplest forms, these funds operate by pooling funds from many different investors, and then investing this money into commercial properties such as shopping centres, offices, warehouses or even whole industrial estates.
Commercial property agreements tend to provide two further benefits to investors. Long leases, usually 10 years or more, provide stability, and upward-only rent reviews ensure a continually improving return. But like any investment in a downturn there is a degree of risk and they can prove illiquid, ie difficult to convert to cash.
REITS
Real estate investment trusts (REITS), introduced recently in the UK are both tax-efficient and flexible. Normally such funds invest in commercial property, such as office buildings or industrial complexes. This means that other factors, such as whether the companies leasing your office space can keep up with rent repayments, can affect your investment.
They are exempt from Capital Gains Tax and Corporation Tax and can also be freely traded on the stock exchange. This is an advantage for those who want to invest in property without being tied in. But, be warned, the recent fall in commercial property demand has meant that these investments have become far more illiquid and much riskier.
So what's best for me?
Property provides a wealth of investment options and demands a good deal of further thought and investigation. It’s quite a complicated area, so you would be well advised to speak to an independent financial adviser. You can search for one here.
