CHP 16 Flashcards
Prime property scores well on the following:
- Location
- Age and condition
- Quality of tenant
- Number of comparable properties available to determine rent at rent review and valuation
- Lease structure
- size
- Investment and risk characteristics of direct property investment
Property is a real asset and would therefore be expected to provide a hedge against unanticipated inflation.
Property Cashflow pattern
Leases are for longer periods with relatively infrequent rent reviews. The increases may be upward only but only occur once every few years. If the property is leasing above market value, it may not change for a number of years.
The running yield on property (rental yield) is usually between equities and conventional bonds.
Property Marketability
Property is very unmarketable, it can take long to buy or sell and the dealing costs are high.
This is because of the following characteristics:
• Unit size – usually large and not divisible.
• Uniqueness
• Valuation – judgment with no market for quoted property prices. There may be large variation between valuers. As sales take place infrequently, the market is characterized by lack of information.
Property Security
Security of income depends on the tenant.
Rent payable by a company is a prior charge to its profits, but costs of recovery of unpaid rent can be high and there is a risk of voids, where the property had no tenant.
Property Spread
Capital values of buildings could be volatile over the longer term, although infrequent valuations and stable valuation method will reduce short-term volatility.
As land is indestructible, a good site is always likely to have some value.
Property Yield
In comparison with index-linked government bonds, property is less marketable and less secure. Thus investors will require higher yield.
Property Expenses
Property management costs are high although the tenant is often responsible for building maintenance and insurance.
Property Investment characteristics can be changed by the owner
e.g. redevelopment or renegotiation of lease agreements. It is also possible to improve the area if the developer owns a lot of the properties in a certain area.
Property other risks
Obsolescence – land and buildings lasts for long if maintained, there is a risk that it becomes obsolete. This results in a slowdown in relative growth of old buildings versus new ones. In time modernization is required.
Owing to its political significance, property is susceptible to government intervention such as rent and planning controls.
- Freehold and leasehold property investment
Freehold has the property for ever and can occupy or rent it out, develop – subject to planning restrictions.
There could be covenants, easements such as right of way, planning and building regulations and statutory requirements not to cause nuisance to others.
3.1. Pooled property funds
Various vehicles exist for this, such as open-ended unitized funds and closed-ended investment funds.
These vehicles normally have constitutions that specify the type of property that they can invest in, limits on liquidity, management charges, etc.
3.2. Property company shares
Alternative to pooled property fund is investment into a property company.
Large property companies can invest in properties too large for most pooled property funds and does not have the same restrictions on management fees and investment mandates.
Larger companies also invest in property developments, which carries greater risk than investing in existing buildings with tenants.
3.3. Comparison of direct and indirect property investment
Larger institutional investors must make a comparison between investing in direct property and property shares when choosing the most appropriate property medium.
