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    CISI - Financial Products, Markets & Services

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    Lenin Borlado
    Here are some of the key advantages and disadvantages of direct property investment that the groups discussed: Advantages: - Can provide positive long-term returns - Reliable income stream from rent - Acts as hedge against inflation - Diversifies portfolio from other assets Disadvantages: - Illiquid asset that can be difficult to sell quickly - Takes significant time and costs to purchase/sell - Assumes responsibility for maintenance and repairs - Reliant on having tenants that pay rent on time - Subject to prolonged downturns in local property market - High costs of maintenance and management The groups covered many of the important factors around both the potential benefits but also risks and responsibilities of direct

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    CISI - Financial Products, Markets & Services

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    Lenin Borlado
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    Here are some of the key advantages and disadvantages of direct property investment that the groups discussed: Advantages: - Can provide positive long-term returns - Reliable income stream from rent - Acts as hedge against inflation - Diversifies portfolio from other assets Disadvantages: - Illiquid asset that can be difficult to sell quickly - Takes significant time and costs to purchase/sell - Assumes responsibility for maintenance and repairs - Reliant on having tenants that pay rent on time - Subject to prolonged downturns in local property market - High costs of maintenance and management The groups covered many of the important factors around both the potential benefits but also risks and responsibilities of direct

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    Here are some of the key advantages and disadvantages of direct property investment that the groups discussed: Advantages: - Can provide positive long-term returns - Reliable income stream from rent - Acts as hedge against inflation - Diversifies portfolio from other assets Disadvantages: - Illiquid asset that can be difficult to sell quickly - Takes significant time and costs to purchase/sell - Assumes responsibility for maintenance and repairs - Reliant on having tenants that pay rent on time - Subject to prolonged downturns in local property market - High costs of maintenance and management The groups covered many of the important factors around both the potential benefits but also risks and responsibilities of direct

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    55 views9 pages

    CISI - Financial Products, Markets & Services

    Uploaded by

    Lenin Borlado
    Here are some of the key advantages and disadvantages of direct property investment that the groups discussed: Advantages: - Can provide positive long-term returns - Reliable income stream from rent - Acts as hedge against inflation - Diversifies portfolio from other assets Disadvantages: - Illiquid asset that can be difficult to sell quickly - Takes significant time and costs to purchase/sell - Assumes responsibility for maintenance and repairs - Reliant on having tenants that pay rent on time - Subject to prolonged downturns in local property market - High costs of maintenance and management The groups covered many of the important factors around both the potential benefits but also risks and responsibilities of direct

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    of 9

    CISI – Financial Products, Markets & Services

    Topic – Financial Assets and Markets


    (3.3) Property
    Investing in property
    Property is often considered as a separate type of asset in which to invest, that is distinct
    from other asset classes such as shares and bonds.

    RESIDENTIAL PROPERTY COMMERCIAL PROPERTY


    Property suitable as a dwelling (with some Property that is purchased for rental income
    exceptions) and/or to make a profit on sale

    Industrial property
    Buy-to-let (Rental)

    Retail property

    Holiday homes Office developments

    Agricultural land

    Second homes
    Apartment blocks
    Residential vs. Commercial Property

    Other distinguishing RESIDENTIAL COMMERCIAL


    factors PROPERTY PROPERTY
    Typically short, Long-term contracts with
    Tenancies periods commonly in excess
    renewable leases
    of 10-years

    Responsibility of the Responsibility of the


    Repairs landlord tenant

    Difficult as the size of investment


    Purchase properties
    required is large. Investment is
    Direct Investment directly through estate
    limited to property companies and
    agents
    institutional investors
    What distinguishes property from other asset classes?
    Each individual property is unique – location, structure, size and
    NATURE design

    It is subjective – individuals find different characteristics


    VALUE attractive and there is no central marketplace

    TRANSFER & Subject to complex legal considerations and transaction costs


    are high
    SETTLEMENT
    Highly illiquid - it can take a considerable amount of time to
    LIQUIDITY buy or sell a property. The investor also has to sell the whole
    property or nothing at all.
    Property can only be purchased in discrete and generally
    sizeable and relatively expensive units, making diversification
    DIVERSIFICATION difficult – only institutional investors can do this effectively

    Supply of land is finite and its availability can be further


    EFFECTS ON PRICE restricted by legislation and local planning regulations. Price of
    property is heavily driven by changes in demand and not
    supply.
    Direct investment in property
    Direct investment in property has at times provided
    positive real long-term returns with a reliable
    stream of income and little volatility.

    An exposure to property can provide


    diversification benefits within a portfolio of
    investments due to its low correlation with other
    asset classes like equities and bonds.

    Many private investors have chosen to become


    involved in the property market by purchasing
    residential properties they intend to rent, known
    as the buy-to-let market.
    Direct investment : Buy-to-let
    Things to consider when investing in buy-to-let properties
     Long-term potential of the property – looking for high yields
     The local market – what type of properties are in demand?
     Do your research into the local market

    Landlord obligations
     Legal obligations:
     Gas and electrical appliance safety
     Fire safety regulations
     Repairs and maintenance – safe and free from hazards
     Local council and planning regulations
     Multiple occupancy permits
     Deposit protection
     Pay income tax on rental income

    Economic Risks
     Economic downturn
     Inflation
     Interest rate rises
    Direct investment : Buy-to-let
    A Rental yield is the amount of money a landlord receives in rent over one
    year, shown as a percentage of the amount of money invested in the
    property.

    Monthly rental return X 12


    Rental Yield = X 100
    Investment
    Source: http://www.telegraph.co.uk

    Buy-to-let: hotspots for 2015


    % of housing Average house Average annual
    Location  Rental yield 
    stock privately price  rent 
    rented 
    Manchester  26.85%  £108,870  £8,628  7.98% 

    Kingston upon
    Hull  19.02%  £69,135  £5,400  7.81% 

    Blackpool  24.16%  £79,654  £5,856  7.35% 

    Forest Heath  21.80%  £171,322  £12,432  7.26% 

    Coventry  19.02%  £116,946  £8,424  7.20% 


    Indirect investment in property
    Others with less money to invest wanting to include property
    within a diversified portfolio generally seek indirect exposure via
    a collective investment scheme (CIS), or shares in publicly
    quoted property companies.

    REITS (Real Estate Investment Trusts)


    REITs are companies or groups of companies that manage
    a portfolio of real estate to earn profits for shareholders.
    Their special tax status means that they pay no
    corporation tax on the profits of their rental business, but
    they need to comply with a number of conditions set out in
    tax law.
    Advantages and Disadvantages of investing in property

    Task

    In groups, discuss and list all of the advantages and disadvantages of investing in property that
    you can think of, based on what we have looked at during the lesson.

    Direct investment
    It can provide high for private
    Significant
    positive real investors
    maintenance costs
    long-term
    returns
    Subject to
    prolonged
    downturns Disadvantages
    Can offset risk
    Advantages of investing
    from other
    of investing assets in a property
    property portfolio High
    transaction Lack of
    costs liquidity

    It can provide a Inability to find


    reliable stream of tenants
    income

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