WEEK 6

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Property Investment Overview

• Learning Objectives:

  • Understand characteristics of commercial and residential property investment.

  • Determine investment returns, past performance determinants, and market volatility.

  • Leverage effects on risk and return.

  • Grasp taxation issues related to property.

  • Assess pros and cons of indirect investment in property.

Investing in Property

• Rise of the ‘Property-Owning Middle Class’: Growth of individuals owning property as an investment.

• UK Property Market: Governance of both residential and commercial property.

• Gearing Property Investments: Use of leverage to increase potential returns.

• Returns on Investment: Consider both long-term and short-term perspectives.

Advantages of Property Ownership

• Security: Owning property provides stability.

• Capital Appreciation: Increase in property value over time.

• Income Generation: Rental income from properties.

• Buy to Let: Opportunity to purchase rental properties for income.

• Collateral for Loans: Property can be used as security for borrowing.

• Downsizing and Retirement: Selling property to fund retirement.

Disadvantages of Property Ownership

• Lack of Liquidity: Difficulty in converting property to cash quickly.

• Indivisibility: Can't easily split property investments.

• High Initial Investment: Significant funds needed for diversification.

• Time and Costs: Involvement of maintenance, management, and legal issues.

• Legal Problems with Tenancy: Potential disputes with renters.

• Uncertainty of Occupancy: Fluctuating cash flow due to vacancy risks.

Residential Property Investment

• Income and Tax Implications: Understanding rental income and taxes.

• Stamp Duty: Tax on property purchases.

• Buy to Let: Explore advantages (e.g., rental income) and disadvantages (e.g., market risks).

• Choosing Property and Risks: Importance of selection and awareness of market declines.

• Tenure: Different forms of property ownership (freehold vs leasehold).

Commercial Property

• Types: Retail, office, and industrial spaces.

• Tax Position on Income: Understanding income tax implications.

• Capital Gains Treatment: How gains are taxed upon selling property.

• Other Costs: Stamp duty and maintenance costs.

Indirect Investment in Property

• Main Investment Vehicles:

  • Property shares.

  • Property unit trusts and OEICs (Open-Ended Investment Companies).

  • REITs (Real Estate Investment Trusts).

  • Property funds.

  • Insurance company property funds.

  • Limited liability partnerships and offshore investments.

Advantages and Disadvantages of Pooled Property Investments

• Expertise: Access to professional property assessment.

• Risk Distribution: Risks spread across various investments.

• Liquidity: Greater liquidity than direct property investments.

• Control: Lack of control over specific properties.

• Illiquidity: Despite better liquidity, some illiquidity remains.

Property Appraisal

• Types of Returns: Understand both rental yield and capital growth.

• Rental Yield Calculation: Key metrics include gross rent and expenses.

Rental Yield Scenario

• Example Setup: House divided into 2 flats, expected rental £480/month each.

  • Void Periods: Anticipating a 10% vacancy rate.

  • Purchase Price: £180,000 plus additional costs.

  • Agent Fees: 15% of gross rent.

  • Further Expenses: 5% of gross rent.

• Gross Rent Calculation:
  ext{Gross Rent} = 480 imes 12 imes 2 imes 90 ext{ extperthousand} = 10,368

• Adjusted for Expenses:
  10,368 imes 80 ext{ extperthousand} = 8,294

• Rental Yield Calculation:
  ext{Rental Yield} = rac{8,294}{180,000 + 1,800 + 1,200} = rac{8,294}{183,000} ext{ yields } 4.5 ext{ extperthousand}

New Buy to Let Rules 2015

• Changes Post Summer Budget: Including tax relief adjustments and stamp duty increases.

• Impact on Higher Rate Taxpayers: Diminished tax relief leading to increased tax obligations.

Summation of Insights

• Government Initiatives: Promoting home-ownership through tax incentives.

• Ownership Benefits: Include security, income generation, and asset appreciation.

• Recognizing Disadvantages: Illiquidity, investment risk, and maintenance costs.

• Commercial Property Attractiveness: Opportunities for larger investors in structured formats.

• Indirect Investment: Accessing property markets through corporate shares and trusts for diversified exposure.