Alternatives to Direct Property Investment

Drawbacks of direct property investment

Property investment has historically been a great way of investing your money.  It’s no coincidence that a high proportion of the UK rich list have made or increased their fortunes in part down to finding investment property that have secured good long-term returns. But is residential property still a good long-term bet.? Before newbie landlords rush out and go about finding buy-to-let (BTL) property to invest their cash in they should be aware of the potential drawbacks of direct property investment.

Investing directly in property has its drawbacks – hassle, cost of entry, risk. The investment drawbacks of holding residential property directly are:

• The costs of acquisition of property can be high, typically £2000+
• The minimum capital required is large, with a minimum amount for a deposit, acquisition fees, set up costs of probably £20,000+
• The timescales for buying and selling property is long and the timing uncertain i.e. it takes many weeks and you rely on finding a willing buyer or a property that you want at the right price
• Management time is far greater than non-direct property investment
• Generally timescales are long.
• Residential property is a long-term investment where your capital is tied up and cannot be accessed unless you remortgage your BTL mortgage

Advantages to indirect property investing?

There are a number of ways that it is possible to invest indirectly in the residential property market but first, what are the advantages of indirect investment?

1. the size of the investment can be much smaller than direct property investments, rather than thousands it can be hundreds of pounds
2. the investments are much more liquid so it’s easier to put money in and easier to take funds out
3. there are little or no management involvement in the investments
4. the entry and exit costs from the investment are also a lot smaller

Current alternatives to direct property investment

The strong performance in residential property has led to a number of innovative schemes looking at ways that investors can invest in residential property without having to do it directly.

Investing in property via the stock market

One way to invest indirectly in residential property is through the stock market.  There are a variety of companies whose performance depends to a greater or lesser degree on the residential property market.  For instance, there are the numerous quoted house builders which as well as carrying out development, also hold large land banks.  The asset value of these companies often varies in line with the underlying value of residential property as land costs generally rise and fall in sympathy with house prices.  Another company to consider is Grainger Trust – www.graingertrust.co.uk .  This company is the UK’s largest quoted residential property owner, with over 12,000 homes.  As well as owning property they are also active in other related areas such as equity release, asset management and house building.  Opening a share dealing account is a lot easier than you might imagine.

Property investment funds

The Diverse Fund launched by Cordea Savills, the investment arm of the property company Savills Plc offers the opportunity to invest in student halls of residents, residential homes for doctors nurses & housing association properties on long leases.  It is a Jersey quoted Oeic (Open ended investment company).  It can borrow up to 70% of the value of it’s assets and has a current value of £10 million.  Minimum investment is £10,000.  The fund aims to capitalise on the growing popularity of student accommodation as an investment asset.  The fund has a 5% yield and the projected capital growth in the fund is in excess of 10% per annum between 2006 and 2010.

Sipp (Self Invested Personal Pension)

Great things were promised by the Government for personal pension holders as a result of ‘A-Day’ at the start of the 2006 tax year.  This catchy expression was meant to herald in a raft of new ways of investing for your retirement through a SIPP, including the ability to hold residential property in it.  Not for the first time the Government failed to deliver.  In a dramatic last minute U turn; it removed residential property from the list of qualifying investments.  This dashed the hopes of many existing and potential residential investors.  However, in the latest twist to the saga the regulations were ‘tweaked’ by the budget to allow the direct holding of residential property in a SIPP but only through a syndicate.  The qualifying criteria are quite restrictive in that the syndicate must comprise of 10 or more people and that the properties cannot be used by syndicate members.  In addition, the SIPP must be worth £1 million or more and have 3 or more properties.  No single property should be worth more than 40% of any individual SIPP.

REITs (Real Estate Investment Trusts)

REITs have been available in the US and Japan for a number of years and are very popular with investors as they provide a transparent way to invest in property but without the difficulties of direct ownership.  The attractions of REITs to the investor and property company is that they pay no corporation tax on their rental income. From the 1st Jan 07 UK property companies are free to convert to a REIT.   In returns the companies under the regulations have to distribute 90% of their income to investors.  This means that yields on the shares are likely to be high compared to other equity investments quoted on the stock market.  The other attraction to REITs, which ultimately can invest in residential property as well as commercial property; is that they will be able to be contained within a PEP or ISA.  This allows any income and ultimate capital gains if the shares are sold to be received tax free.

In general, it is likely that the number and variety of schemes available for indirect residential investment will increase as institutions and companies continue to explore ways of allowing investors to access this popular and strongly performing asset class.  If the US experience is anything to go by, one of the developments could be the emergence of specialist REITs that invest purely in residential property giving small investors a genuine opportunity to invest indirectly in UK residential property without the drawbacks of direct ownership.  Watch this space for developments and keep up to date with the latest news through Property Hawk’s blog.

Commercial property funds

As I have already commented on the fact that institutional investment funds have traditionally avoided residential investment but at the same time have long been large investors in commercial property.  Commercial property is yet another way of diversifying your investments.  It has shown some strong returns in recent years.  Investment funds come in a variety of forms including investment trusts, unit trusts and oeic.  They provide a mechanism for individual investors to have a share in the capital appreciation and income derived from investing in a range of commercial property.

Financial Advice

If you find all the talk about investment returns and capital boring and confusing.  Then, maybe it is time that you sought professional advice.  To source a IFA (independant Financial Adviser) try www.unbiased.co.uk which is the website for IFA (Independent Financial Advisers).

IFAs are the only advisers that are able to advise and select from the whole range of investment products on the market.  They are bound by the Financial Services Rules, which ensures that any product that they recommend should be suited to your personal circumstances.