PropertyOct 22 2014

Everything you need to know about property funds

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      CPD
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      CPD
      Approx.30min

      Investing in commercial property potential adds another asset class to, and thus increases the inherent diversification of, an investor’s portfolio.

      Traditionally seen as an ‘alternative’ investment, until the launch of a number of tax-efficient investment vehicles, life companies and property company shares were seen as the only access to this asset class for investors, rather than direct investments.

      A commercial property is normally seen to be a larger lot size than residential and as such pooled investments, professionally managed, are a good way to access the asset class. This is because property investing involves purchase, ownership, management and rental, or development and sale of ‘immovables’.

      The basics

      A ‘bricks and mortar’ investment - and even if held indirectly all commercial property investment is ultimately such - is typically seen as a store of value and a provider of a stable, relatively high income stream over the long term. The security of each determines different levels of risk to the investor.

      In the UK, commercial property normally reflects the movement of GDP growth, but as a result quantitative easing institutional money borrowed at cheap rates is being channelled into the sector, isolating it from weak or strong economic activity.

      Some advisers argue that most clients already have exposure to property through their main residence, so they don’t need any more

      From an adviser perspective property investment tends to place the community into binary camps. On the one hand, some argue that most clients already have exposure to property through their main residence, so they don’t need any more. Or that other clients have enough exposure because they have decided to expand their investments to include ‘buy-to-let’ properties.

      Others feel that residential property has a different dynamic to commercial and therefore exposure to this asset class is warranted. It is generally accepted that residential has different characteristics in investment terms to commercial property and could therefore be seen as a separate asset class.

      As an asset class it has also been shown to be negatively correlated to others; in other words its ‘price’, or value, moves differently to equities and fixed interest.

      Property is not exchange traded and is usually transacted as a ‘matched bargain’ or through different types of auctions. A fair value can be determined using a set of criteria, but the price paid will always be what the purchaser is willing to pay and the vendor will to accept.

      Having said that, properties that throw off a steady stream of income from rents, can be seen as a ‘bond proxy’.

      Risk profile

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