RLA : RPI : Spreading the risk

News from the Residential Property Investor, the bi-monthly magazine for RLA members

other artilces from the August / September 04 issue

Spreading the risk - August / September 2004

Residential property has proved to be a good investment, but putting everything into one type of investment means increasing the risk. So it pays to be alert to possible alternatives that can spread that risk

Residential property has been a good investment over the last 50 years, and especially in the last five or so when the stock market has languished. But over the years there have been blips in the seemingly ever upward trend in house prices, meaning property investment is certainly not risk free.

Landlords also know very well that entering the private rented sector is hardly hassle free.

Currently it is widely predicted that interest rates will continue to rise even if not too dramatically and for not too long and that the housing market will lose some of its attractiveness.

Apart from such considerations, there are always more localised risk factors to be taken into account. For example, upmarket city centre apartments are selling well to professional landlords, residents and investors, but police forces are increasingly reporting complaints of noise from city dwellers as councils, greedy to gain additional business rates, are allowing more and more clubs and pubs to start up and opening hours to lengthen. Local property prices are likely to be affected.

Meanwhile investors such as those buying properties along the proposed three new lines of Manchester's Metrolink system, covering Oldham, Rochdale, Ashton-under-Lyne, Wythenshawe and Manchester Airport, may find their expectations of high returns frustrated. They will have bought on the assumption that prices will shoot up in these areas as a result of improved communications but that was before transport secretary Alistair Darling withdrew the promised £520m in Government support for the line at the end of July. Unless the 'get our Metrolink back on track' forces him into a u-turn, values could remain relatively stagnant.

It may be time for landlords to think about spreading their risks and diversifying their property investments. Alternatives that do not stray too far from residential investment include putting money into commercial property, buying in other markets (such as abroad), or investing in property related companies.

Overseas properties in places such as Spain, France, Cyprus and Florida are becoming increasingly popular investments, especially because property prices appear so low compared to those in the UK. Those who have bought off plan are reporting substantial gains although there are mistakes to be made, difficulties to be overcome, and hazards, such as the recent hurricane in Florida, to be avoided. Possible mistakes include those arising from not knowing the local market well enough, or the local law. Difficulties include language and having to manage a property from long range.

Private investors are apparently also becoming more and more interested in commercial property, often buying at auction. The advantages include having tenants whose credit is easy to check, who will occupy the premises for the longer term, and who cannot easily disappear into the night owing rent. Rents usually have built in reviews, and prices, like those of residential property, have been climbing steeply.

The disadvantages are that commercial properties tend to be larger and more expensive and less easy to finance especially if a loan equal to a high percentage of the value is required.

Of course owning something physical rather than just a share certificate or some other financial instruments has its attractions to many. Companies can go broke, but if you own a building, that remains yours even if the tenant is no longer around.

The same sort of consideration applies to woodlands and to land investments.

'Forestry offers investors a unique opportunity. Returns on investments are entirely tax free. There is no liability for income tax, capital gains tax or inheritance tax (once held for two years)', according to FIM, which claims to be 'the market leader in the UK for forestry investment advice'.

Target investment returns are currently around 5 per cent to 6 per cent and FIM also points to the 'feel good' benefit in owning an ecologically sound investment something which may or may not count with hard nosed investors.

The UK excels at growing and processing softwood timber, for which the world market is rising, suggesting the possibility of higher returns to come, says the firm.

Another possibility is to buy land with building potential. Finding suitable plots is likely to be difficult but Sustainable Land plc offers to do the hard work for investors.

'Our expertise allows us to identify and acquire strategic sites in areas where national house builders also operate buying up potential future housing sites and "land banking" them', it claims.

'We have acquired and will only continue to do so land which has been identified or safeguarded by county councils as suitable for future housing developments, land which has only ever in the past been available to major house builders that have pursued and promoted large sustainable parcels of land for release for new homes and have reaped the rewards for their shareholders of their expertise leaving house buyers and investors alike to pay the end gross value figure'.

'People don't realise the potential for profit in land development and choose what they perceive to be the safer option of becoming a landlord or renovator', claims John Skelton, manag ing director of Taylor Skelton Walters Plc, a company that plans to create a network of licensees throughout the south who will be able to identify and purchase 'planning gain' opportunities.

This form of investment is where the real money is now being made in the property market, claims the company. It will be aided by the more relaxed attitude to planning permission resulting from the increasing pressure to build more homes in the south.

Buying land means forgoing income, of course, and even investing through companies such as TSW and Sustainable Land is hardly risk free.

'We cannot guarantee planning on a greenfield site, nobody can', admits the latter.

If land appeals, buying allotments is a possibility. In many areas allotments are council owned, but not all. Expect lengthy waiting lists where allotments can be bought. Even so, some can be purchased for as little as £500 a modest outlay considering developers are keen to get their hands on them. Rents are fairly low but holders in Forest Hill, south London, recently sold their plots for £23,300 apiece.

There are various ways to invest in property related companies. These include direct share purchases, holding unit trusts which specialise in putting money into a range of property businesses, or into 'open ended investment companies' (OEICs). Another type of quoted collective investment vehicle, the latter were introduced in the UK in 1998. Originally they could not invest in property but the Financial Services and Markets Act now allows them to do so.

The Government has also been consulting on introduction of 'property investment fund' which are likely to become another route to investment in property via the stock market.

The stock market has provided investors with good returns over the longer term and has increased six fold over the last 15 years. Shareholders also receive some income from dividends and can cash in at any time. But in the shorter term prices can vary considerably the stock market fell sharply between 2000 and 2003 for example, and the share price of even major companies can vary by several percentage points from day to day.

This means that some investors prefer to spread the short term risk by investing in funds or companies that themselves invest in a range of companies.

The Schroder Indirect Real Estate product is a fund of funds, investing in property unit trusts, OEICs, limited partnerships and property shares, for example. A minimum investment of £25,000 is required. Norwich Union operates two property funds, while Aberdeen Unit Trust managers has a property share unit trust with major holdings in such companies as Land Securities, British land, Slough Estates, and Great Portland Estates. Its value has increased by 80 per cent since 2000.

Another version of the collective investment approach is to put money into offerings such as that recently launched by Nottingham developer Fiducia. Founded last year through the merger of Henry Davidson Developments and Eden Park Developments, Fiducia has called on the advice of stockbroker Goy Harris Cartwright to set up a fund that is intended to raise up to £6.5m in partnership units of a minimum of £250,000 (increasing in multiples of £50,000 thereafter). This will be invested in commercial or mixed use projects.

The aim is to attract high net worth investors and advisers, who seek exposure to this asset class without the risks associated with individual property investments. Investors become partners in the fund, and are eligible to receive a share of the profits and capital gains achieved during the fund's seven year lifetime. However, they are warned not to expect any return in the first year.

The fund should not find it too difficult to attract investors as a survey by insurer AXA indicates that nearly a third of wealthy people would rather put their money in bricks and mortar than in shares. Some 29 per cent of the top 10 per cent defined in terms of income, assets or property said they would invest in property, compared with 23 per cent who would put their money into the stock market.

But AXA investment marketing manager, Mike Mumford, warned that, whilst property continues to provide solid returns, it is important not to focus too heavily on one type of asset as this could mean missing out on growth in other areas such as shares.

It is not only property developers and property companies in which shares can be bought. Others with property related interests include Highland Timber plc, for example. Other listed companies have interests in the growing home reversion market this is the facility offered older home owners with a substantial equity interest in their homes to raise cash by effectively selling off a proportion but with the right to continue to live in the proper ty for the rest of their lives.

Home reversion plans have recently become regulated by the Financial Services Authority.

The Council of Mortgage Lenders estimated (in 2001) that older home owners had an estimated £394bn in unmortgaged equity locked up in their dwellings, an average of £88,500 per dwelling. So the market is potentially very large CML suggests that up to £5bn of equity release business could be done each year.

Latest CML figures show equity release loans to older home owners had reached £3.3bn by the end of June, representing nearly 71,500 mortgages.

Member companies of SHIP, the trade organisation Safe Homes Income Plans and Equity Release Plans include major building societies but also companies such as New Life Mortgages Limited, Key Retirement Solutions, Hodge Equity Release, part of the Julian Hodge Bank, Bridgewater Equity Release Limited, a subsidiary of Grainger Trust plc, and In Retirement Services Limited.

Of course some landlords may think it time to move away from property altogether. There are many options and a good few will be on display at the Alternative Investment Show which coincides with the Property Investor Show to be held at London's Excel Centre from 17 to 19 September so a visit to one can be combined with a visit to the other. Companies there will be offering investment possibilities ranging from art and antiques to spread betting, from precious metals to racehorse partnerships. A number will be extolling the virtues of investing in fine wines.

Wine can, and often has, outperformed the FTSE 100 and the Dow Jones, offering significant returns without the volatility of the stock market, claim companies in the business. But of course there is an unanswerable fallback if things go wrong. Investors can always use their stocks to drown their sorrows in style.

other artilces from the August / September 2004 issue

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