Asset Classes 5 - Property (direct)

Question 1

Advantages of property investment?

Answer 1

• Low volatility
• Inflation hedge

Question 2

Differences between residential and commercial property?

(in terms of tenancies, repairs & returns)

Answer 2

• Tenancies - Residential short, Commercial long term >10 years
• Repairs - Residential=landlord, Commercial=tenant
• Returns - Residential - income and capital appreciation, Commercial - mainly income

Question 3

3 Key Economic Factors affecting property investments?

Answer 3

1. position in the cycle at purchase,
2. GDP growth
3. inflation (in this order)

Question 4

Best and worst economic conditions for property investments?

Answer 4

• Best scenario – high-growth, low-inflation stage of the economic cycle associated with the non-inflationary consistent expansion (NICE) era.
• Worst scenario – high-inflation, low-growth (stagflation) stage

Question 5

How long are commercial property leases and which sectors have the highest yields?

Answer 5

• Typically let on long leases of up to 25 years, with three- or five-year rent reviews.
• Offices, factories and warehouses tend to produce the highest yields in the property sector, and retail typically produces the lowest yields.

Question 6

What is commonhold?

Answer 6

Involves the indefinite freehold tenure of part of a multi-occupancy building (typically a flat) with shared ownership of and responsibility for common areas and services.

Question 7

What happens to REIT prices when investors are cautious?

Answer 7

Discount to NAV increases

Question 8

Rental yield formula?

Answer 8

Rental yield (%) = Gross rent − Expenses / Cost of propert y, including purchase costs

Question 9

How is residential property taxed?

in terms of income and offsetting

Answer 9

• rental income taxed as business income (treated as a single business regardless of no. of properties).
• Investors can offset losses from one property against profits from another.

Question 10

What is the tax free allowance for renting a room in your own home?

Answer 10

Up to £7,500 a year for the 2024–25 tax year.

Question 11

What are AIA and WDA with regard to qualifying plant and machinery and fixtures and fittings for commercial property?

Answer 11

• AIA (annual investment allowance) provides 100% tax relief on assets that are kept for use i.e. plant and machinery
• WDA (writing down allowance), the owner is allowed to deduct a certain percentage of the cost of an item from their profits each year (for items not eligible for AIA).

Question 12

What is Agricultural Property Relief and how is it calculated?

in terms of tax

Answer 12

• inheritance tax (IHT) relief for agricultural property
• it includes agricultural land, growing crops and farm building but it does not include animals or equipment
• APR is claimed at two rates.

1) 100% for owner-occupied farms, land that is let on a grazing licence, and property that is let on a tenancy beginning on, or after, 1 September 1995.

2) The relief is 50% for interest of landlords in most other let farmland.

• The property must have been occupied by the donor for agricultural purposes for the previous two years or have been owned by the donor for seven years and occupied by someone else for agricultural purposes at that time.

Question 13

Which investments does overseas-investment affect the most: commercial or residential property?

Answer 13

Commercial property can be vulnerable to influences on overseas investment to a greater extent than residential property

Question 14

What is the allowance for paying 0% Stamp Duty

Answer 14

£250,000

Question 15

What are the thresholds for 5% Stamp Duty?

Answer 15

The next £675,000 (£250,001 to £925,000)

Question 16

What are the thresholds for 10% & 12 % Stamp Duty?

Answer 16

10% = £925,001 to £1.5 million

12% = > £1.5m

Question 17

How much stamp duty do corporates and non-natural persons pay? (including CISs and partnerships)

Answer 17

15% over £500,000

Question 18

What is the additional stamp duty for second homes?

Answer 18

3%

Question 19

What is the additional stamp duty for non-uk residents?

Answer 19

2%

Question 20

How is non-residential stamp duty calculated?

Answer 20

the amount of SDLT depends on the purchase price of the lease (the lease premium) and the value of the annual rent paid (the net present value (NPV)

Question 21

What are the thresholds for commercial SDLT?

Answer 21

Up to £150,000 - Zero

The next £100,000 (the portion from £150,001 to £250,000) = 2%

The remaining amount (the portion above £250,000) = 5%

Question 22

What three factors does the Association of Real Estate Funds’ quality mark include with regard to property funds?

Answer 22

• Governance of the fund.
• Operation of the fund.
• Unit dealing and performance reporting.

Question 23

What is the formula for the initial yield on a property?

Answer 23

Initial yield (%) = Current annual rent / Value of property, including purchase costs

Question 24

What is the formula for the Capitalization (CAP) rate?

Answer 24

Cap rate = Net operating income / Sales price or value of propert y

Question 25

Do sellers want to sell at a high or low cap rate?

Answer 25

Low (because it’s divided by the value)

Question 26

What is the reversionary value?

Answer 26

• The reversionary value of a property is the expected value at the end of the term of the lease.
• It is in the nature of leasehold tenancy for a property’s value to diminish as the lease expires, and a long lease is generally worth more on the open market than a short lease.

Question 27

How are tenants improvements to a property included in the reversionary value?

Answer 27

• These must be disregarded for the purposes of the valuation.

If the improvements are substantial, the valuer will have to calculate the additional value they give to the property and then discount this to compute the present value.

Question 28

How do commercial property returns tend to behave relative to other assets?

Answer 28

Historically has moved in different directions to equities and even to residential property, making it a good asset for diversification within a portfolio.