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Property Investments – Direct and Collective Investments

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Investment Options

Access to property investments is well-established, with a range of direct investment opportunities and collective investments available for both retail and institutional Investors alike. In the first instance we should look to the range of property sub-sectors available for consideration, and further investigate both direct and collective access points for the sector in general.

The main property sub-sectors that may be available for smaller investors are:

 

  • Residential
  • Commercial
  • Student Accommodation
  • Care Homes
  • Hotels
  • Leisure / Tourism
  • Development
  • Agricultural
  • Forestry

 

Within each sub-sector lies a range of possible entry points for Investors; broadly categorised as either direct investments or collective investments. Collective investments being either regulated or unregulated fund arrangements, where Investors capital is pooled so as to acquire a basket of assets, or participate in a project with a large capital requirement. Direct investments on the other hand are simply straightforward acquisitions of property assets by the Investor. There are, for example, funds for residential, student accommodation commercial and most other sub-sectors, and likewise, there are options for Investors to directly acquire investment properties in each of these sectors via freehold or leasehold title.

Direct investments – Simply the acquisition of property assets by the Investor, direct property investments take many forms; from the acquisition of property for improvement and sale; through to acquisitions for leasing/rental to a tenant or operator. For the Investors with sufficient capital or finance, direct investments remove the majority of risks specific to collective investment schemes where Investors are reliant on the external management of a property portfolio. Direct investments do however carry asset-specific risks; property assets can incur significant financial liabilities including on-going maintenance, tax and round trip purchasing costs (the cost of buying and selling an asset).

Property investments, especially direct property investments, provide the Investor with a level of security that paper-based investments do not due simply to the fact that quality property assets retain capital value throughout the long-term, which in the case of well-chosen properties in good locations, is unlikely to fall and cause the Investor a capital loss. Provided the Investor is prepared and capable of tolerating the illiquidity associated with physical property assets, this asset class provides true diversification out of traditional financial assets such as stocks bonds and cash.

For the direct Investor, careful consideration should be given to the due diligence process during the asset identification and acquisition stage, as in most regions this will require specific professional input from legal practitioners, surveyors, valuation agents, and in the case of niche property investment projects with a specific strategy Investors must also consider the counterparty risk in that in many cases Investors might be reliant on the performance of a strategy manager to achieve the expected returns from investing in their strategy.

Collective investments – Property funds come in all shapes and sizes, and invariably involve a Fund Manager acquiring a basket of properties in line with the fund’s investment strategy, and managing those assets on behalf of Investors in the fund. There are funds, both regulated and unregulated, that invest in all of the major property sub-sectors. One can find opportunities to invest in residential real estate, student accommodation, care homes, commercial real estate, shopping centres and property developments. Some of these funds cater only to large Institutional Investors, whereas other offer lower entry levels for smaller Investors.

The structure of collective property investments varies from fund to fund. Some are highly regulated affairs, established and operated by major asset management groups, others are small, niche operations established to capitalise on current short term opportunities or niche sectors or markets. Collective funds may be listed on an exchange, allowing smaller Investors to trade in and out of the fund as and when they please. This removes the potential illiquidity associated with the property asset class, however this also detracts substantially form the returns generated from the underlying property assets as some capital is never invested in order to ensure that redemptions can be made from cash without liquidating part of the underlying portfolio.

Whether listed or unlisted, regulated or otherwise, collective investments in property assets offer access to the asset class for the smaller Investors, although in many cases the cash flow dynamics of securitised investments differ greatly from direct investments in property assets.

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