Simon Morris - A Guide to Property Investment in 2015
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The document discusses predictions and trends for the property investment market in 2015, highlighting the impact of economic factors and the upcoming UK general election. Despite initial challenges and a slowing housing market, particularly outside London, the property sector is expected to see steady growth and continued interest in property-based investment funds and bonds. Key investment strategies mentioned include the use of tax-efficient ISAs and property investment bonds, emphasizing the importance of regulatory oversight and informed decision-making for investors.
Simon Morris - A Guide to Property Investment in 2015
- 1. 2015 A Guide to Property Investment in 2015
- 2. Looking back over 2014, the economy has had to contend with Middle Eastern conflicts, the possible break-up of the UK with Scottish independence and constant speculation about interest rate rises. Despite all this, the property market had another record year. 2015 looks set to be another busy 12 months, with general elections in the UK and 11 other countries, the oil price dropping and yet more speculation about a possible interest rate rise. So, what’s in store for property in 2015? While todays modern economists have complex tools to predict markets, as the recent past has shown, nobody has a crystal ball when it comes to predicting the monetary future. Despite this, the Centre for Economic and Business Research (CEBR) has made its annual prediction for the year ahead. With interest levels remaining low, investors are still on the search for investment opportunities that bring about the best return, with property prices remaining high, particularly in London, looking at property-based funds and investments is predicted to remain popular. Overview
- 3. The CEBR believes that the year will start badly with negative trends in China, Japan, the Middle East, Russia and especially Europe. Failing prices in the UK, with oil being key, should mean that the economy in the UK will really only kick into gear from June onwards. Not all economists agree, but the CEBR believes that we’ll dodge the interest rate rise again in 2015, I believe interest rates will stay the same until after the general election in May, but further than that is anyone’s guess. Many economists are predicting a rise to 0.75 per cent in or around August 2015. Especially if the economy is doing well. Starting badly
- 4. This time last year inflation was the big concern, there were very real worries that it was set to be an issue in 2014. That’s now passed, and as we sail into 2015, inflation may even fall further according to the CEBR. Unemployment also fell during 2014, and this trend is expected to continue in 2015. The pound is expected to strengthen after the election, alongside growth in the UK and the Bank of England finally flipping the switch on interest rates. The election is still key to all of this and we’ll look at that now. The election The UK isn’t the only country going to the polls, Canada, Mexico, Argentina, Nigeria, Israel, Poland, Portugal, Spain, Sweden, Sir Lanka, Myanmar, Thailand and Turkey are also voting, and this comes on the back of the recent election in Greece which may still have longer term repercussions for the Euro. The CEBR quite honestly predicts that the UK general election could see significant changes in Parliament with this having the potential to rock the recovery. At the moment the country and city will be waiting to see any impact this has on public spending and investment this year. Falling inflation and unemployment
- 5. It’s been widely reported that the housing market did slow down towards the end of 2014, and more house building should push prices down further. Outside London house prices should stay stable but the London market will continue to grow, but not as fast as before. Tighter affordability checks from lenders should also slow the market, as well as the inevitability of house buyer interest waning when the gap between earnings and property prices makes ownership unfeasible for some. An influx of foreign investors helped property prices throughout 2014, this is especially true for London. I expect the capital to show growth again this year, but remain flat until after the election. Outside of London, growth will be there, but more modest than last year. Property website Rightmove believes property is set to soar over the next five years, it is predicting gains of over 30% and believes that markets outside of the capital will lead the way. These are headline grabbing figures, but I’d side with more cautious predictions for the time being. What to expect from the property market in 2015
- 6. Property remains one of the best investment vehicle of the last few years, this is true whether you own bricks and mortar stock or have money in a property fund or bond. There is still value in a number of property investments, and I’d expect steady growth in the second half of 2015. Commercial property funds were consistently one of the top-selling fund types among investors. These come in two guises: portfolios that invest in the shares of property firms, which essentially are an equity play on the market; and those which invest directly in bricks and mortar, these especially are popular at the moment. Apart from diversification away from stocks and shares, these investments offer the opportunity to spread their cash over a broad variety of buildings, including offices, retail parks and even student accommodation. The rents paid by tenants can provide a stable and rising income stream and a very healthy yield. If you’re interested in investing, and haven’t taken advantage of your yearly ISA (NISA) tax- efficient savings allowance this next section is for you. Commercial Property
- 7. NISAs are savings and investment accounts with a tax-efficient savings benefit. You can use them to invest in stocks, shares, bonds and funds. On 1 July 2014, Cash ISAs and stocks and shares ISAs were merged into a new single ISA (NISA) with a much higher limit of £15,000 per year. The advantages of investing through a NISA is that you pay no Income Tax on any interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax. Investing in property through the tax-efficient wrapper of an ISA is popular with many investors, but like all financial products you should seek advice if you don’t understand the product fully. Listed property bonds and funds are perfect choices for the ISA investment wrapper, and this is proving a popular way to take advantage of gains that are being seen in the property market. Contact your ISA provider for details of how to purchase these funds and bonds within the stocks and shares ISA wrapper and the costs involved. The process of purchasing funds and bonds for an ISA investment is relatively straight forward and usually low- cost. Investors need to be aware of the risks involved and should seek financial advice where required. If you’re looking to get started on property investment in 2015 either through an ISA or by adding directly to your portfolio, this next section will offer the informed investor some vital information about the types of property fund. New Individual Savings Accounts (NISAs)
- 8. Property investment bond Fixed income property bonds are now available and offer healthy re- turns in the region of 6-8%. These are proving an increasingly popular option for investors looking for low risk and high yield. How do property investment bonds work? Bonds are a fixed income invest- ment product that are issued by companies as a way of raising finance. The bond issuer pays the investor for the privilege of using their money in the form of interest payments known as the coupon. The interest payments are made at a determined rate and on a determined schedule. The bond will have a maturity date in which loan is repaid to the investor. So, with bonds you’ll know exactly how much you’ll get back if you hold the bond until maturity. Bonds are tradeable on the mar- ket and a bond’s price can change daily like any other equity. You can buy or sell bonds at any time, you don’t need permission from the bond issuer to sell the bond. Bonds can be affected by changes in interest rates, but this is off-set by the advantages of knowing your long-term return. Offering a good, safe investment and typically providing a secure income and healthy capital return property bonds are really starting to be the investment vehicle of choice in the current market. With the property market predict- ed to show healthy returns in 2015 and beyond a fixed income proper- ty bond is way to take advantage of property price gains without having to physically own and maintain any property yourself. Advantages of property bonds: • Fixed income • Healthy returns in the region of 6-8% • Return on the original investment on maturity • Tradeable • An easy way of taking advan tage of predicted property market rises • A conservative investment that has the potential to provide large gains • Less volatile than equities Simon Morris, Property Advisor to Investment Funds has lately seen a rise in popularity of property investment bonds and he believes that this is an excellent way to take advantage of the buoyant property market. Types of Property Fund
- 9. Bricks and mortar funds A number of physical properties are purchased by the fund, spreading the risk across the properties. Returns are made from an increase in value of the properties, but also the rental income. Benefits of direct commercial property investment funds Longer lease lengths (e.g. five years or more), result in a reduced risk of empty tenancies, along with upward-only rent reviews. This means that rental income increases at least by the rate of inflation each year. The Fund Manager is responsible for sourcing tenants, investing in property in prime locations, and negotiating lease lengths. Risks • If the initial capital is tied in, buying or selling property can take long periods of time, making it difficult to sell your holding in the fund quickly. If you’re looking for quick returns – this type of fund may not be ideal for you. • If the property boom bursts, financial markets property values may decrease. Watch out for clauses in the contracts that allow Fund Managers to lock down the fund with “exceptional circumstances.” • If a number of Investors are looking to reclaim their cash, under FCA rules, property funds can suspend trading for 28 days, whilst they try to raise enough cash by selling properties, to meet the repayments of Investors. This period may recur until the fund has enough capital to meet redemptions; previously in unstable times, this period lasted as long as a year.
- 10. Indirect commercial property funds • This is property investment once removed. The funds invest into companies, who have large property portfolios. Associated shares are listed on the Stock Exchange, and traded on a daily basis, no different to any share trading. Due to the daily trading, unlike with direct commercial property funds, there are no liquidity issues, so investors can move in and out of the fund with ease, and access their cash. • Returns are reaped as they would be in any other investment in shares; through share price appreciation, and dividend income, rather than directly through property price increases and rental income. But while you get the benefit of the liquidity of an equity- like product, you also get the volatility of investing on the stock market. Real estate investment trusts The great majority (over 80%) of these property companies are known as Real Estate Investment Trusts (REITs), and have greater tax benefits, than other listed property companies. REIT companies don’t pay corporation tax on their assets, on the condition that 90% of profits are paid to shareholders as dividends, which in turn, could mean higher pay outs. REIT investors pay either 20%, or 40% tax, because they’re classed as property-letting income.
- 11. Property investment trusts Alternatively, you could invest in property investment trusts, which will pool your money to buy property and property company shares. The difference between these and REITs, is that they’re considered to be like any other company, so tax on dividends is only 10% for basic-rate payers, and 32.5% for higher-rate payers. Investment trusts can do things that unit trusts and OEICs can’t. For example, many property investment trusts use gearing - a process whereby the companies borrow money - to boost the amount they can put into property, beyond what you have invested. While this can enhance gains in a rising market, it can magnify losses if returns fall. Regulation of Funds It’s recommended that any investment you sign up to is regulated and authorised by the FCA (Financial Conduct Authority). If the Funds Management Company goes bankrupt, the investment belongs to you, and you are protected as the investment remains in place. A trustee or depositary is appointed to oversee and safeguard the fund’s assets (your investment). Their objective is to oversee the management of the fund, and ensure that the fund is run with the best interests of its investors in mind. Regulated funds have rules in terms of what a manager can and can’t do – so be aware of the following: • There are limits in the type of investments that can be made. • There are rules in terms of the information that the fund manager gives to you. • Restrictions on the way funds can be promoted and sold. • Regulations governing the charges and costs you pay.
- 12. Research Your Fund Before you invest in a fund – ensure that you are aware of the following: • The type of property that the Fund is investing in, i.e. Office, Commercial. • If the fund concentrates on Commercial or Retail Properties – check out the existing tenancy arrangements – are there existing tenants? How long is the lease agreement? • The locations of the property within the portfolio. London and Manchester are two of the UK’s favoured locations at the moment. But be aware of the strategy of the properties purchased, along with research prices, trends and the economy, in the related areas. • The level of risk you’re signing up to. There are funds available now that guarantee the initial capital invested. Higher risk usually is balanced with higher yield, but be aware of the risk level of the fund. • Check the management charges. Are they paid up front? How do they compare with other Funds? • Be aware of how long your money is tied up for. Can you release your investment quickly, or is it tied into a period of time?
- 13. If you are serious about investment into property, Simon Morris offers the following key pieces of advice:- • Ensure that the Fund is regulated or managed by a regulated manager. • Ask questions in terms of; - Management Fees - Types of Property that the portfolio includes or may include - Locations of the property - Existing Tenancy Arrangements – length • Some funds guarantee the initial capital invested – check the details for this. • Keep an active interest in the health, management and performance of the fund. • Watch out for changes in the Management Company • Keep an active eye out on property and financial news Summary
- 14. Simon Morris is an Independent Property Consultant with over 15 years’ experience in property investment. Simon actively works with a number of funds and high net worth individuals, advising on property purchases, to ensure investments made into property, are measured in terms of risk, and bring solid return on the initial investment. About the author
- 15. 2015 A Guide to Property Investment in 2015