It’s amazing that a state like Monaco still exists. In the 19th century, there was a century-long shift towards...
February 12, 2019
Owning property for investment without owning property personally
The expression “as safe as houses” is often used to express how stable and secure something is. When investors are choosing the best market to find decent returns on the money they’ve worked hard to earn, property continues to be a popular option. The rationale behind that choice is that people will always need houses and that, with an ever increasing population, it makes sense to invest in bricks and mortar because of the sustained demand for housing.
Britain is a nation of homeowners. We don’t just value the importance of having a roof over our heads – we also like to be able to call it our own. That’s why more than two-and-a-half million British people have chosen to invest in buy-to-let property (source: Landlord Today).
We have a primary residence for ourselves and our family – a functional need. As well as its functional purpose, those two-and-a-half million of us view property as a form of investment, some of us building impressive portfolios that will help preserve family wealth for generations to come plus an income for our retirements.
One in five of buy-to-let landlords did not aspire to become buy-to-let landlords – they either inherited property from a loved one or they have to rent out their old home because they can’t sell it (source: Mortgage Introducer).
Whatever the reason, investing in property remains a popular and, as long as it’s done sensibly and your market timings are right, safe way to make your money work harder for you.
Being a landlord isn’t easy though. It takes a lot of work, commitment and there are often a few headaches along the way. The landlord/tenant relationship isn’t always an easy one and things like boilers have a habit of going wrong at the most financially inconvenient times.
It’s not for everyone and, in this article, financial journalist Mark Fairlie looks at other ways of investing in property without becoming a landlord.
Real estate investment trusts (REITs)
A real estate investment trust (REIT) is a kind of property investment company which often, although not always, is listed on the stock market. REITs that are listed on the stock market offer investors the opportunity to benefit from upward share price movements and from dividends when market sentiment is favourable. And because they are listed on the stock exchange, selling them is easy and fast in case you change your mind about a company’s prospects or you wish to rebalance your portfolio in some other way.
REITS have to meet certain qualifying conditions to be classed as REITS. For example, a REIT must ensure that at least ¾ of their income and assets derive from property rental and that at least 90% of their net income must be paid back to investors.
Investors who seek an ongoing income source are often particularly attracted to REITs because, in most cases, REITs will seek long-term rental agreements with financially stable tenants. Some REITS are heavily focused towards the retail sector, for example, with the companies buying or building commercial properties which they then rented out to big-name retailers. While there’s no guarantee that any company renting space will stay in business, long-term lease agreements with financially stable retailers offers investors comfort. Some REITs spend investor cash on residential buy-to-let and others on warehouses – when choosing where to put your money, place it with a company you believe is most likely to benefit from economic, consumer, and business trends.
It’s also worth noting that, because 90% of the trust’s income must be paid back to investors, it might take longer for a REIT to invest in other opportunities further down the line because of cash flow constraints. REITS are able to borrow money to expand however cash flow and the ability to pay dividends to investors may come under severe pressure if the markets they operate in experience a downturn creating rental voids.
Real estate exchange traded funds (ETF)
Real estate exchange traded funds (ETFs) invest in the shares of property companies, REITs, and debt instruments used by property-related companies. The ETF provider chooses which shares and investments should be part of their portfolio and they will often readjust the composition of their investment pool to balance out risk. The fund managers use their industry expertise to keep the fund value similar to the underlying value of assets and debts of the companies and instruments they are invested in (something called the Net Asset Value).
It’s a somewhat risky form of investment as it’s subject to volatility in the market, however, when it works well, the returns can be significant.
Real estate mutual funds
Property funds are split into two different types; real estate investment funds and real estate mutual funds. In order to understand whether a mutual fund is right for you, it helps to know how real estate investment funds work too.
Real estate investment funds are for investors staking millions of pounds – “big ticket” investors. A mutual fund requires a much smaller amounts of capital from each individual investor – “retail” investors.
Both types of fund hold investors’ money in the companies for the long term. Investment funds are designed to pay out in periods of up to 7 years so participants must prepared to play the long game. The smaller mutual funds, however, have a much shorter investment horizon with some investment periods being as short as a week. However, investors in mutual funds should really retain their shareholding for at least two or three years to derive appreciable benefits from a fund’s position.
There are two main varieties of real estate mutual funds:
·funds which invest directly into building ownership or management, covering the whole process of property sourcing through to tenant selection
·funds which only invest in REITs
Like any investment opportunity, there are some risks involved, so please do your due diligence and seek professional advice before you commit.
Invest in property companies
Some investors choose to invest directly in shares of property management and construction businesses via the stock market. If you find the right company to invest in, you can make money over time if you choose a well-managed company which makes good investment decisions and which is careful with cash flow.
Property management and construction companies tend to specialise so it is prudent to analyse the fortunes of a sector before you make a decision.
Would you back a company heavily invested in the retail sector? It’s well known that changes to the way people shop have affected the British high street leading to more and more bricks and mortar stores going into administration. Will this trend continue? Or do you believe the sector is near the bottom and you see a high street revival in the next few years? See this feature on Mike Ashley in the Guardian.
On the other hand, there’s “big sheds” – these are huge commercial developments built throughout the UK offering online retailers the chance to put their stock in warehouses close to motorways enabling them to get their products out to customers more quickly. This Guardian article goes into more detail about the Big Shed phenomenon. Would you put your money in this? 1 in 5 UK consumer pounds is spent online and if this continues will it mean greater demand for warehouse space? Or are there black clouds hanging over the economy meaning that you should keep your money out of big sheds until prospects look brighter?
Peer to peer lending has revolutionised the way small businesses get started in the UK and abroad over recent years. They connect people who need money with those who are looking to invest, ideally creating a win/win situation for lenders and borrowers. Funding Circle is probably the best known platform for businesses, while Zopa is aimed at personal loans. For more information about peer-to-peer lending, 4th Way have got a great article on it – click here for this article.
David Stevenson of the Financial Times recently asked if property peer-to-peer lending is “ever a good idea?”. This was quickly followed by an article from his colleague ominously entitled, “Warning over peer-to-peer defaults”.
Some property bonds qualify for IFISA inclusion offering investors a fresh way to enter the market without having their own name tied to a property. The bonds often focus on one specific development or class of development. When a project is completed or on redemption date, investors receive their money and any interest back.
Each scheme is unique and you should do your due diligence. Try to make sure that you have a clear understanding of what the developer is looking to achieve and that they can demonstrate a clear business plan and pay-out process.
It’s riskier than some other forms of investments because there’s no guarantee that your capital will be returned in full or in part if the company involved fails. However, if everything goes to plan, you’ll benefit from an impressive annual return on your money for the term of the bond.
The Azurite Property Bond
The Azurite Bond is a property bond offering for sophisticated investors and high-net-worth individuals, providing the opportunity to invest in the residential infrastructure of Monaco.
To learn more about the Azurite investment, please download our brochure here.