Depending on who you talk to or what you read, you’ll probably hear a variety of pros and cons about property investing. Alongside shares, bonds and cash, property is one of the four most common types of investment and if you are a homeowner, you are technically already property investing.
In this article, we take a look at how property can form part of a diversified portfolio, as well as the potential highs and pitfalls of investing in the property market.
The Property Investing Market
Rising house prices and increasing consumer confidence has driven mortgage lending to a seven-year high, causing a new dilemma for policymakers, according to The Week UK last month. The Telegraph reported in November that house prices across the UK have risen 6.1% over the past year, pushing the average cost of a home in London beyond the half-million mark to £531,000. Regionally however, there were variations in growth over the 12-month period. Property prices rose 6.4% in England and 10.2% in Northern Ireland, but just 1.1% in Wales and 1.1% in Scotland.
Whilst demand in London is currently high, but more stable throughout the UK overall, property investing is worth considering if you are looking for a long-term opportunity for your money. However, property prices and demand go up and down, so whether you are invested directly (by purchasing a property for your own residence or for rent) or indirectly (such as through a property fund) we would not recommend this as a short term investment. Holding a property investment for longer can help you ride out any potential losses in a slow housing market and increase your profits when it rises.
We also do not recommend over-investing in property as this could have an adverse effect on your portfolio in a slower housing market. Creating diversification by holding a variety of investments we feel is usually the better option.
The Methods of Property Investing
- Owning your own home: as mentioned, if you own your home, you already have an investment which will hopefully increase in value during the time that you hold on to it, particularly if you are able to add value through home improvements.
- Buy to let: you can purchase a property and rent it out, gaining a regular income through a weekly or monthly rental, as well as any potential increase in value once you are ready to sell it.
- Property Funds: like other funds, investors pool their money together and the fund manager invests this money into property or property shares. Most property funds invest in commercial property through an Open Ended Investment Company (OEIC) or Individual Savings Account (ISA), again providing you with an income from both the rental and any growth in value.What Investment (2 December) reported that commercial property has been a noteworthy beneficiary of recent monetary policy. Since the onset of quantitative easing (QE) in the UK, the total return on commercial property has been 104%, with an income yield of 5.4%. This compares to government bond yields at 1.8% and the FTSE 100 Index at 4.1%. Yet while income is an important component for many investors, they state that the potential for capital return should not be overlooked: over the past six years, UK property investors have benefited from capital growth returns of 33%. This has largely been the result of QE as investors have bid up property asset prices in the search for income. It is equally important to keep in mind, however, that capital values in commercial property are cyclical. Physical direct property sales take time to negotiate and there must be a willing buyer.
The Downsides of Property Investing
- The value of properties can fall as well as rise, therefore the value of your investment can also fall.
You are responsible for the costs associated with buying a property like stamp duty, surveys and legal fees, or if you are investing in a property fund – these will need to be paid by the fund, which can also affect its value.
- Rental growth is not guaranteed and any unpaid rent could affect the performance of your investment.
- Property can be difficult to buy or sell and in the case of a fund, cash could build up waiting to be invested, so the fund will underperform when property returns are greater than the interest earned on cash, or if markets go down, the property may have to be sold for less than expected potentially leaving you in a negative equity scenario.
- Some property funds may delay withdrawal requests in the best interests of all the investors. The delay can be for a period of six months or more.
- The value of property is based on the opinion of the person valuing it rather than fact.
- Rental income will be subject to income tax (or Corporation Tax if a company is the owner) and gains on the sale of a property which is not a main residence are subject to CGT (Corporation Tax on capital gains if a company is the owner)
Considerations before Property Investing
As this article shows, there’s no doubt that property investing looks like a very worthwhile opportunity within a diversified portfolio. However, as with any investment you need to ensure this suits your overall investment strategy and risk profile. In addition, as a long-term investment, it’s important to do as much research as you can before you make any decision about property investing, past returns on property investments are not necessarily a guide to the future. If you are interested in finding out more about property investing and whether or not it is suitable for you, we will be happy to answer any questions you may have.
The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. Bridge Investment Partners Ltd. is not responsible for the contents of external sites.
These links may be useful: www.moneyadviceservice.org.uk and www.direct.gov.uk
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