Investing In Property
The Armageddon that everyone talked about where banks offloaded masses of commercial property has not materialised. Investors can now see sustainable yields from their commercial property investments and with savings rates as low as they are, yields of c 9% are difficult to ignore.
In this context we are talking about prime commercial assets as opposed to secondary. Secondary is almost unsellable. Prime assets are expected to bottom out from an underlying price point of view by the end of quarter three 2009, and the news that lenders are widening their loan to value supports that. Whereas many lenders were only offering 50-60% loan to value, this has eased off considerably as expectations of price falls have lowered.
Property shares normally react six to nine months earlier than the underlying asset so foresight is everything.
A real estate investment trust (REIT) is an excellent way to tap into this growth and make more than the actual asset growth itself. In 2007 REITs came into existence. The investment is a collective of property related investments which, in exchange for significant tax concessions, a company could convert to a REIT as long as it paid a 2% conversion tax, followed by generating at least 75% of its income from property rental, and distributing 90% of profit as a dividend.
So where is the opportunity for the investor? Consider with a REIT you are buying shares in a fund that invests in property shares. These underlying assets they are invested into will have a value. The share price of the overall REIT fluctuates wildly on the grounds of a number of factors but irrational exuberance and pessimism are two main contributors.
Hence the share price will trade at either a discount or premium to the value of the underlying assets. So if a share purchaser is very positive, the shares are in demand and are at a premium.
The last two years have been negative, capital values have been battered, and shares have been oversold. Most REITs are now trading at a considerable discount to the value of their underlying assets and therein lies the opportunity. For example Hammerson traded in February at a discount to its net asset value of an amazing 56%.(1) To explain what that means to you, if the total assets in Hammerson were realised they would be worth 127% more than the shares are currently valuing them at.
There lies a double opportunity to make excellent gains as sentiment returns so the discount will narrow. Even if the underlying assets don't increase in price, you can gain from that discount to net asset value narrowing.
Furthermore there have been a range of rights issues from REITs who clearly do not need the cash. Why would they do that? They have simply pulled together as much cash as they can to buy up distressed assets at the cheapest price possible. When the entire commercial property market (i.e. the assets in both prime and secondary) returns to favour, the upside return of this sector will be outstanding for those who bought well at the bottom.
Buying well at the bottom however doesn't mean buying when everything is reported by everybody as being perfectly in order. Making money with investments is about buying at the opposite point of that.
All that aside, consider that although property used to be classed as a balance to equities, REITs and property shares, despite what others say, are very closely correlated to equities - in other words you are closely correlated and not diversified.
In this context we are talking about prime commercial assets as opposed to secondary. Secondary is almost unsellable. Prime assets are expected to bottom out from an underlying price point of view by the end of quarter three 2009, and the news that lenders are widening their loan to value supports that. Whereas many lenders were only offering 50-60% loan to value, this has eased off considerably as expectations of price falls have lowered.
Property shares normally react six to nine months earlier than the underlying asset so foresight is everything.
A real estate investment trust (REIT) is an excellent way to tap into this growth and make more than the actual asset growth itself. In 2007 REITs came into existence. The investment is a collective of property related investments which, in exchange for significant tax concessions, a company could convert to a REIT as long as it paid a 2% conversion tax, followed by generating at least 75% of its income from property rental, and distributing 90% of profit as a dividend.
So where is the opportunity for the investor? Consider with a REIT you are buying shares in a fund that invests in property shares. These underlying assets they are invested into will have a value. The share price of the overall REIT fluctuates wildly on the grounds of a number of factors but irrational exuberance and pessimism are two main contributors.
Hence the share price will trade at either a discount or premium to the value of the underlying assets. So if a share purchaser is very positive, the shares are in demand and are at a premium.
The last two years have been negative, capital values have been battered, and shares have been oversold. Most REITs are now trading at a considerable discount to the value of their underlying assets and therein lies the opportunity. For example Hammerson traded in February at a discount to its net asset value of an amazing 56%.(1) To explain what that means to you, if the total assets in Hammerson were realised they would be worth 127% more than the shares are currently valuing them at.
There lies a double opportunity to make excellent gains as sentiment returns so the discount will narrow. Even if the underlying assets don't increase in price, you can gain from that discount to net asset value narrowing.
Furthermore there have been a range of rights issues from REITs who clearly do not need the cash. Why would they do that? They have simply pulled together as much cash as they can to buy up distressed assets at the cheapest price possible. When the entire commercial property market (i.e. the assets in both prime and secondary) returns to favour, the upside return of this sector will be outstanding for those who bought well at the bottom.
Buying well at the bottom however doesn't mean buying when everything is reported by everybody as being perfectly in order. Making money with investments is about buying at the opposite point of that.
All that aside, consider that although property used to be classed as a balance to equities, REITs and property shares, despite what others say, are very closely correlated to equities - in other words you are closely correlated and not diversified.
Play it safe or Gamble with your cash
In modern times, your future financial security is increasingly uncertain. Whether you're planning for your future or you've reached the age of retirement and want to guarantee your prosperity for the years to come, you could benefit from a bespoke package of investment and savings, today.With investment and savings, you could save for the medium to long term and see significant returns on your money. How you invest and where you save is up to you, but you could find some comfort in conducting your higher risk financial affairs, such as investments, under one roof.
Finding out the basics and gaining a better understanding of where to invest can be challenging, but there's plenty of expert advice and opinion worth canvassing before making your decisions.
Investment is all about evaluating risk against return, but it's also a good deal about market savvy. But you needn't be up on all aspects of investment; your investment company can help you make the decisions that are right for you.
Investments are typically higher risk than regular savings and lodgings, but nowadays, you can even invest based on your attitude to risk. The rewards you reap will ultimately match accordingly; a lower risk will undeniably mean safer savings and investment patterns, although a higher risk strategy could potentially net you much higher rates of return on your money.
Your lower risk options include Cash ISAs and Premium Bonds, depositing bonds in savings and cash accounts as well as other tax efficient solutions. Other investment options available to you on the lower risk end of the scale include Fixed Interest Deposits, Gilts and Shorter Dated Bonds. If you are of a slightly braver disposition, you could invest in With-Profits Funds, or even Property Funds. At the pinnacle of risk is Direct Stockmarket Investment, which poses a tumultuous, but potentially highly rewarding investment experience.
If you're disinclined to risk all for high returns and would prefer to see slow but steady increases on your money, then sticking with lower risk options is always going to suit you best. If, however, you feel prepared to take the attitude of Who Dares Wins, then you could consider some slightly higher risk options for investing your money.
With certain investment companies you'll see immediate rewards, such as a one per cent introductory return, meaning if you invest $10,000, you'll instantly receive $100 added on. In addition, your investment company won't simply take your money and run with it; you can receive expert advice and flexible investment solutions to suit your needs, with your lifestyle and later life financial needs taken into account to create a bespoke package of savings and investments for you.
This article has been written for information and interest purposes only. The information contained within this article is the opinion of the author only, and should not be construed as advice or used to make financial decisions. Expert financial advice should always be sought and any links contained within this article are included for information purposes only.
Adam Singleton writes for a digital marketing agency. This article has been commissioned by a client of said agency. This article is not designed to promote, but should be considered professional content.
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