At a time when cash savings are yielding negligible returns, many people are looking at investment funds as a way of making their money work for them. Commercial property, in particular, is predicted to deliver strong returns in the coming months. Obviously, none but the wealthiest individuals can buy a commercial property straight-out, so the way that most of us get exposure is through a collective investment fund which invests on behalf of its members.
An investment fund may either buy into a portfolio of properties, spreading the risk so that if one building stands empty there's still rental income from the others (direct investment), or buy shares in companies that are property related (indirect investment).
With direct ('bricks and mortar') investment funds, the returns come from the increased value of the properties, plus rental income. In the UK, the average lease on a commercial property is 8 years, and rents will typically increase at the same rate as inflation. Furthermore, commercial property tends not to be linked to assets such as cash, fixed income and bonds, meaning that a hiccup on the stock market shouldn't affect their value. Investors don't have the hassle of sourcing and managing the properties, nor do they have to find tenants or negotiate leases. It can take months to buy or sell a commercial property, however, which makes it difficult to redeem your holding at short notice.
The portfolio of most direct investment companies is divided into prime, secondary and tertiary properties. This categorisation is based upon location, quality of the buildings, rental revenue and ability to attract tenants. Tertiary property, at the lowest end of the spectrum, offers the highest yields due to the risky nature of the investment.
Indirect investment funds are even more vulnerable to the whims of the market as they don't enjoy the same benefits of diversification. Most take the form of unit trusts and open-ended investment companies (OEICs).
Both unit trusts and OEICs are open-ended, in other words there's no limit to the number of units or shares that the fund manager can issue. If the demand for units increases they simply buy more property, and if an investor wishes to redeem their holding they sell them back to the fund. This can lead to problems, such as the fund manager having to sell assets at a low price, but it's more user-friendly than buying and selling shares on the stock market.
Most open-ended trusts are also registered as real estate investment trusts (REITs). This ensures higher returns to investors, but the tax on dividends will be 20 per cent basic or 40 per cent for higher rate earners.
When an investment fund issues a fixed number of shares it is called a closed-end fund. Unlike open-ended trusts, if a member wants to either buy into or sell out of the fund he must do it through the stock market. The tax on dividends is the same as for most other investments, i.e. 10 or 32.5 per cent.
The current yields on commercial property compare well to those of other asset classes. The recent lack of investment in building projects has resulted in an increasing demand for office and retail space as the economy recovers. Strong interest from overseas investors is also creating movement.
An investment fund may either buy into a portfolio of properties, spreading the risk so that if one building stands empty there's still rental income from the others (direct investment), or buy shares in companies that are property related (indirect investment).
With direct ('bricks and mortar') investment funds, the returns come from the increased value of the properties, plus rental income. In the UK, the average lease on a commercial property is 8 years, and rents will typically increase at the same rate as inflation. Furthermore, commercial property tends not to be linked to assets such as cash, fixed income and bonds, meaning that a hiccup on the stock market shouldn't affect their value. Investors don't have the hassle of sourcing and managing the properties, nor do they have to find tenants or negotiate leases. It can take months to buy or sell a commercial property, however, which makes it difficult to redeem your holding at short notice.
The portfolio of most direct investment companies is divided into prime, secondary and tertiary properties. This categorisation is based upon location, quality of the buildings, rental revenue and ability to attract tenants. Tertiary property, at the lowest end of the spectrum, offers the highest yields due to the risky nature of the investment.
Indirect investment funds are even more vulnerable to the whims of the market as they don't enjoy the same benefits of diversification. Most take the form of unit trusts and open-ended investment companies (OEICs).
Both unit trusts and OEICs are open-ended, in other words there's no limit to the number of units or shares that the fund manager can issue. If the demand for units increases they simply buy more property, and if an investor wishes to redeem their holding they sell them back to the fund. This can lead to problems, such as the fund manager having to sell assets at a low price, but it's more user-friendly than buying and selling shares on the stock market.
Most open-ended trusts are also registered as real estate investment trusts (REITs). This ensures higher returns to investors, but the tax on dividends will be 20 per cent basic or 40 per cent for higher rate earners.
When an investment fund issues a fixed number of shares it is called a closed-end fund. Unlike open-ended trusts, if a member wants to either buy into or sell out of the fund he must do it through the stock market. The tax on dividends is the same as for most other investments, i.e. 10 or 32.5 per cent.
The current yields on commercial property compare well to those of other asset classes. The recent lack of investment in building projects has resulted in an increasing demand for office and retail space as the economy recovers. Strong interest from overseas investors is also creating movement.
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