Property Flashcards
Explain four risks of buy to let property (8)
- interest rate risk
- mortgage cost increases
- market risk
- property value decreases
- Liquidity risk
- maybe unable to sell when needed
- income/tenant risk
- Void periods/ tenant default
Taxation
Legislation
Costs associated with selling BTL property (3)
- legal fees
- estate agent fees
- mortgage redemption fee
Six reasons why a property fund may hold large amounts of cash and impact on fund performance (6)
- hold cash to pay investors wishing to sell fund
- new property pending
- or just sold a property
- rental income yet to be distributed
- recent influx of investor money
- tactical positioning by the manager
- cash produces very small return
- reduces overall performance in a rising market
Advantages of investing in a property fund rather than directly in BTL (5)
- diversification
- professional management
- less admin
- liquidity
- partial sale options
- regular investment options
Reasons a fund manager may pick a property with a lower yield than another (3)
- linger lease/better terms
- better quality of tenant
- location/ potential for growth
- development opportunities
Aims of a REIT (3)
- provide a liquid market in property investment
- that is widely accessible by the private investor
- and has a tax treatment closely aligned with those in place for direct investment into property
Structure of reit
- must be closed ended
- must be listed on stock exchange
- since 2012 that can include AIM
- must be UK resident for tax purposes
- can only issue one class of share
Usually two separate elements for tax purposes:
1) ring fences property letting business - exempt from corporation tax
2) non ring fenced business offering other services eg property management. Profit and gains are subject to corporation tax
Qualification rules for REIT
- 75%+ of companies total profits must come from ring fenced business (property letting)
- at start of each accounting period value of assets in ring fenced business but be 75%+ of overall assets of the company
- REITS can not have an excessive amount of debt financing (interest in debt financing must be 125% covered by rental income)
- if not then company taxed on excess interest
- 90% of rental profits must be paid out as cash dividends (or stock dividends in lieu of cash dividends)
- REIT must be UK registered/resident
- must be listed on a register stock exchange
- must be closed ended
Internal Tax treatment of REIT
- at least 90% of profits from rental business (income) arising in each accounting period must be distributed as a dividend within 12 months of end of accounting period
- stock dividends can be issued in lieu of cash dividends
- property can be developed within ring fenced business providing it is for the purpose of generating future income I.e. it is added to property portfolio
- if property is developed to be sold for profit then corporation tax will be payable
- if developed for investment purposes then as long as three years have passed then tax exempt
Investor tax treatment of REIT
- two elements
- payment from ring fenced business is treated as UK property income
- paid net of basic rate tax
- non tax players can reclaim it
- ISA investors receive it gross
- higher rate and additional rate payer may additional 20/25%
- dividend from non tax exempt element
- taxed as any other UK dividend
- £2000 div allowance
- 7.5%/ 32.5/38.1%
gains:
- gains in disposal are subject to CGT
Factors which influence the returns of a commercial property fund (7)
- location
- type of holdings (retail, office, industrial)
- liquidity
- rental yield
- quality of tenant
- basis of rent
- Bois periods
- development opportunities
Risks of a REIT (3)
- REIT subject to supply and demand / closed ended
- in a weak market may trade at a discount to the NAV
- stocks could become illiquid
Risks of commercial property via a UT/OEIC on disposal (6)
- liquidity/ manager may not have enough cash to pay sellers
- manager may not be able to sell property
- which would be a disadvantage to other shareholders
- manager may move to weekly valuations
- manager may apply a fair value pricing
- or apply a dilution levy
- or a fund dealing suspension
Why might investing in commercial property protect in a climate of rising inflation compared with bonds (7)
- market value of bonds decreases when inflation increases
- maturity value at redemption is eroded by inflation
- real value of income is eroded by inflation
- as both are fixed
- provides diversification
- opportunity for capital growth
- rental income is revalued upwards with inflation
Conditions to be met for w fund to qualify as a PAIF (6)
- at least 60%
- of income
- must come from exempt property business
- value of property assets must be at least 60% of total assets
- shares must be widely held
- with no corporate investor
- holding more than 10% or more of net asset value
