The Chart below:
Property is arguably a more complex investment in comparison with most other asset classes for reasons of regulation, low liquidity, the requirement for management and the legalities around leases, ownership, etc. However, it is the income generating potential of property which is its standout feature and above all property should be viewed as a long term income generating asset. Property is also a cyclical asset class and values will ebb and flow depending on a number of factors including interest rates, the economic backdrop, the availability of finance as well as simple supply and demand. As a result market timing can be important, although less so for long term investors.
Our advice seeks to optimise the investment returns through identifying a suite of investments from our list of recommended funds reflecting our clients’ personal circumstances and preferences. As advisers, we are strong believers in the appropriateness of property as a core asset for our clients’ retirement arrangements and personal portfolios. However, while retirement arrangements and personal portfolios should have an exposure to property, it is not advisable for it to be the dominant asset. Our recommended ranges for property for each Risk Category are as follows:
|0% to 15%||10% to 20%||15% to 30%||0% to 10%|
In addition, there are myriad ways to gain exposure to property and all routes should be considered with one of our advisors before making a decision. The following paragraphs contain brief descriptions of the more popular ways to achieve property exposure, many of which are on our list of recommended funds:
Property funds allow investors to participate in commercial property and in turn investors get units or shares thereby giving them indirect ownership over numerous properties in different locations. Property funds are usually liquid, some pay distributions to investors and are a popular way to gain exposure to property. The providers are regulated i.e. banks, investment managers and life assurance companies. In addition the funds are regulated e.g. regulated as a Real Estate Alternative Investment Fund (AIF), a Qualifying Investor AIF, etc. Different investing and borrowing rules apply depending on how the fund is regulated i.e. only some funds are permitted to contain debt and that debt can be limited to a specific percentage.
REITs are stock market listed vehicles which hold a basket of property assets which may be located in one or more jurisdictions and may hold one or more property types (commercial, residential, etc.) or may offer exposure to property within a particular sector such as healthcare. They usually carry at least some debt but are highly liquid and commonly pay attractive levels of dividends. Along with investing in a property index, REITs are arguably the simplest way to gain exposure to property.
Property ETFs typically offer an exposure to either a real estate index or a basket of real estate company shares. Again, they are highly liquid and give a high degree of diversification although the level of income distributed is generally lower in comparison with REITs.
Syndicated investments involve amalgamating a number of investors to purchase one or more property assets which might be out of reach for individual investors acting alone. Very often these structures involve gearing and they usually have defined life spans. They also offer low or no liquidity in advance of final liquidation. Because of their predefined terms and their use of gearing, market timing is a more critical factor for these structures than for the alternatives. Investing into a downturn can bring huge levels of risk which may result in investor equity being fully wiped out as occurred post the 2008 financial crisis. On the other hand if the market timing is right these structures can deliver highly attractive returns.
As with the previous category, these structures assemble a number of investors together. In this case, however, the purpose is to provide equity finance for development purposes. As such they do carry an extra level of risk. Normally these investments involve a partnership with a developer and can have an expected life span of c.2 years. With the shortage of bank finance available to developers, combined with the undersupply of housing in urban locations, these structures have become popular in recent years. Again market timing is important, but in favourable circumstances, the returns from these investments can be relatively high. We normally rank development property as very high risk i.e. a risk rating of 9 in a scale of 1 to 10 with 1 being the lowest risk and 10 being the highest.
Purchasing a property asset directly is of course the most obvious way to gain exposure to property but this route does have a number of drawbacks. Firstly, a single property can represent a significant proportion of your retirement arrangement / personal portfolio resulting in a highly skewed asset allocation unless your retirement arrangement / personal portfolio is relatively large. Secondly, direct ownership of property brings with it management costs and headaches which can largely be avoided by using the other routes.
This marketing information has been provided for discussion purposes only. It is not advice, it is provided for general information purposes only and does not fully take into account your financial position, investment needs and objectives, attitude to risk, liquidity needs, capital security needs, capacity for loss, etc. It should therefore not be relied upon to make investment decisions.
The particular legislative and tax information contained herein is based on Harvest Financial Services Limited’s understanding of current Revenue practice as at February 2017. Please note that the tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should take such independent tax advice as you deem appropriate.
Please note that the provision of this product or service does not require licensing, authorisation, or registration with the Central Bank of Ireland and, as a result, it is not covered by the Central Bank’s requirements designed to protect consumers or by a statutory compensation scheme.
Warnings: Past performance is not a reliable guide to future performance. The returns in the chard do not represent the actual returns achieved by individual investors. If you invest in property you may lose all of the money you invest. The value of the property may be subject to sudden and large falls in value. If you invest in property you may have restricted access to your money. Changes in exchange rates may have an adverse effect on the value price or income of the product. Some routes my restrict access to specific types of investor ie. a Qualifying Investor under AIF, a Qualified Investor under the prospectus regulations or a Professional Investor under MiFDID.
* It may be difficult for clients to sell or exit and/or to obtain reliable information about its value and/or to obtain reliable information about the extent of the risks to which it is exposed.