Property Investments Flashcards
What is the difference between alternative investments and alternative investment products? (2)
- Alternative investment products are securities that allow us to gain indirect exposure to alternative assets e.g. exposure to property indirectly through a REIT/property bonds
- Alternative investments would include real, physical property
What types of property is categorise as commercial property? (4)
- Retail shops (tend to produce the lowest yields)
- Offices
- Industrial units, factories and warehouses (tend to produce the highest yields)
- Hotels
What are the risks of commercial properties? (3)
- Potential returns come from rental income and rising gains
- Key risk are vacant properties (void periods) when suitable tenants cannot be found - income streams stop. All expenses are funded by the owner including borrowing costs
- Commercial property is more illiquid that residential property
Summarise residential property (4)
Direct investment: second homes, holiday homes, buy to let
Tenancies: typically short renewable leases
Repairs: landlord reponsible
Returns: rent linked to house prices
Summarise commercial property (4)
- Direct investment: large initial outlay restricts investment to institutional investors
- Tenancies: long term contacts
- Repairs: tenant responsible
- Returns: rent linked to income potential
What are the features of the property market? (6)
- Segmented - comprises of numerous sub sectors e.g. commercial, residential, agricultural unlike shares and bonds which are relatively standardised
- Indivisible - potentially excluding smaller investors
- Costs are higher e.g. legal fees, estate agents, brokers, land registry charges
- Decentralised - no central marketplace for property - difficult to compare properties nationally and cross border
- Require maintenance: repair costs and maintenance costs can be extortionate
- Strictly government regulated - Housing Act, stamp duty, income tax on rental income, CGT policies all impact the buying/selling of properties
What is the advantage of property investments? (5)
- Returns are less volatile
- Risk diversification benefits
- Has the features of bonds (regular income) and equity (capital growth)
- Regarded as a hedge against inflation
- Has a residual value
What are examples of indirect property investment and their benefits? (4)
- Investing in property/real estate funds such as Traditional Property Funds, REITs
- More liquidity in a fund than in physical property
- Achieve better diversification
- Lower buying costs than buying a physical property
What is a direct property investment? (1)
- Having a direct interest or investment in the physical land/property
What are the costs of buying, selling and owning property? (6)
- Legal fees, SDLT, surveying, estate agent cots, maintenance costs
- Lack of liquidity - takes time to find a buyer
Who are the owners of commercial property? (7)
- Institutions, CIS, listed property companies, unlisted property companies, traditional estates/charities, private investors, overseas investors
How do you calculate rental yield? (1)
Rental yield = gross rent - expenses/all costs of buying property
How do property bonds work? (2)
- Are issued by life assurance companies where the coupons are linked to the underlying value and rental income from the property in the fund
- Dividends or coupons payable on property bonds are secured on the rental flows from the property portfolio
What are property income certificates? (2)
- Gives indirect exposure to the income and growth of property
- The certificates are often linked to a specific property
How are REITs an investment trust? (5)
- Indirect way to invest in commercial property
- Pooled investments
- Close-ended funds
- Shares can fluctuate on the market, causing them to be either at a premium or at a discount to their NAV
- Allowed to borrow to invest e.g. gearing up
What is unique about REITs from normal investment trusts? (7)
- They are a plc listed on the LSE main market or AIM
- At least 90% of their taxable income must be paid to investors (property income not div income) net of 20% withholding tax
- Pay no CGT
- No investor can own more than 10% of shares
- At least 75% of assets and income must be directly related to property
- At least 3 properties must be owned with no single property representing more than 40% of total assets
- REITs can borrow - must meet interest cover test to ensure not too highly geared
What is unique about REITs from normal investment trusts? (7)
- They are a plc listed on the LSE main market or AIM
- At least 90% of their taxable income must be paid to investors (property income not div income) net of 20% withholding tax
- Pay no CGT
- No investor can own more than 10% of shares
- At least 75% of assets and income must be directly related to property
- At least 3 properties must be owned with no single property representing more than 40% of total assets
- REITs can borrow - must meet interest cover test to ensure not too highly geared
What are the uses of property derivatives? (6)
- Contract written based on real estate property index
- Gives investors exposure to real estate without directly owning physical property
- Index displays aggregate real estate market information as opposed to individual asset - broader, more accurate representation of performance
- Used to hedge positions held in underlying assets
- Speculate on the property market
- Quickly and efficiently change composition of portfolio e.g. switching from retail to commercial property
What indices and databases are property investments available on? (5)
- Indices published by Investment Property Database (IPD Annual Index) - used in 15 EU countries and 7 global markets
- The ONS house price index - UK
- Nationwide Building Society - based on mortgage offers they make
- Halifax Building Society - based on mortgage offers they make
- Land Registry - based on complete register of all residential sales
What are the limitations of indices? (5)
- Too general - limits particular segments or locations in property markets
- Sample size can differ, limiting accuracy
- No standardised approach to construction of index
- Time lagers between agree prices and trade date
- Sample bias - most indices are based on transactional data - what has been bought and sold doesn’t give indication of housing market as a whole
What is the difference between market and investment value of a property? (2)
- Market value - current market rate
- Investment value - value derives from how the property is used
What is the difference between market and investment value of a property? (2)
- Market value - current market rate
- Investment value - value derives from how the property is used
What are the 3 property valuation approaches? (3)
- Cost: amount based on what it costs to buy the land and then build the property
- Sales comparison: market value is estimated based on similar properties bought/sold in the area around the same time. Also uses hedonic pricing and regression techniques to identify estimate of what individual characteristics are worth e.g. no of bedrooms
- Income: Calculate an assumed constant ‘net operating income’ (NOI) and divide it by discount rate called ‘market cap rate’
What is the formula to calculate the property value via the income approach? (1)
- Property value = net operating income/market cap rate
What are some ESG issues in the property market? (5)
- Land contamination, pollution, air and water quality
- Health and safety of employees
- Management of environment and social issued and business ethics
- Flood risks
- Waste management
What is the Paris Accord? (3)
- Concerns itself with global warming - participants in the property sector ought to understand that it is their duty to manage ESG and climate related risks
- Buildings that do not meet regulations suffer from ‘regulatory obsolescence’
- Countries signed up to the Paris Accords look to reduce greenhouse gas emissions and move towards net zero
How can properties become more efficient under the Paris Accord? (5)
- Reduce operations expenses
- Support higher rents
- Reduce vacancy rates
- Give clients a better experience
- Lead to more productive employees
