Property investment for beginners
Property is traditionally seen as a safe investment by British savers. We're all familiar with the residential market, but the commercial market is less understood. To actually buy a commercial property requires wealth, but collective investment funds offer exposure even for those of modest means.
An investment fund may either buy into a portfolio of properties, spreading the risk so that if one building stands empty there's still rental income from the others (direct investment), or buy shares in companies that are property related (indirect investment).
Commercial property, such as shops, offices and industrial buildings, has several advantages over residential. Firstly, the average life of a commercial lease in the UK is eight years, as opposed to six months; secondly, the tenants are less likely to flit; thirdly, the rents themselves are much higher and subject to annual increases.
The portfolio of most direct investment companies is divided into prime, secondary and tertiary properties. This categorisation is based upon location, quality of the buildings, rental revenue and ability to attract tenants. Tertiary property, at the lowest end of the spectrum, offers the highest yields due to the risky nature of the investment.
Indirect investment funds are usually set up as unit trusts and open-ended investment companies (OEICs). They trade shares in companies whose primary investment is property. The fund is managed, so members are protected from the pressure of decision-making and the fund manager is able to exploit the economies of scale to get better prices.
Both types of fund are open-ended, in that there's no limit to the amount of capital that may be invested. The fund manager will simply buy and sell property according to demand. Investors don't have to trade shares on the stock exchange, the fund manager sells them their holdings and then buys them back any time they wish to join or leave the fund.
Most open-ended trusts are also registered as real estate investment trusts (REITs). This ensures higher returns to investors, but the tax on dividends will be 20 per cent basic or 40 per cent for higher rate earners.
When an investment fund issues a fixed number of shares it is called a closed-end fund. Unlike open-ended trusts, if a member wants to either buy into or sell out of the fund he must do it through the stock market. The tax on dividends is the same as for most other investments, i.e. 10 or 32.5 per cent.
The current yields on commercial property compare well to those of other asset classes. The recent lack of investment in building projects has resulted in an increasing demand for office and retail space as the economy recovers. Strong interest from overseas investors is also creating movement.
An investment fund may either buy into a portfolio of properties, spreading the risk so that if one building stands empty there's still rental income from the others (direct investment), or buy shares in companies that are property related (indirect investment).
Commercial property, such as shops, offices and industrial buildings, has several advantages over residential. Firstly, the average life of a commercial lease in the UK is eight years, as opposed to six months; secondly, the tenants are less likely to flit; thirdly, the rents themselves are much higher and subject to annual increases.
The portfolio of most direct investment companies is divided into prime, secondary and tertiary properties. This categorisation is based upon location, quality of the buildings, rental revenue and ability to attract tenants. Tertiary property, at the lowest end of the spectrum, offers the highest yields due to the risky nature of the investment.
Indirect investment funds are usually set up as unit trusts and open-ended investment companies (OEICs). They trade shares in companies whose primary investment is property. The fund is managed, so members are protected from the pressure of decision-making and the fund manager is able to exploit the economies of scale to get better prices.
Both types of fund are open-ended, in that there's no limit to the amount of capital that may be invested. The fund manager will simply buy and sell property according to demand. Investors don't have to trade shares on the stock exchange, the fund manager sells them their holdings and then buys them back any time they wish to join or leave the fund.
Most open-ended trusts are also registered as real estate investment trusts (REITs). This ensures higher returns to investors, but the tax on dividends will be 20 per cent basic or 40 per cent for higher rate earners.
When an investment fund issues a fixed number of shares it is called a closed-end fund. Unlike open-ended trusts, if a member wants to either buy into or sell out of the fund he must do it through the stock market. The tax on dividends is the same as for most other investments, i.e. 10 or 32.5 per cent.
The current yields on commercial property compare well to those of other asset classes. The recent lack of investment in building projects has resulted in an increasing demand for office and retail space as the economy recovers. Strong interest from overseas investors is also creating movement.
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