Property is traditionally seen as a safe investment by British savers. We’re all familiar with the residential market, but the commercial market is less understood. To actually buy a commercial property requires wealth, but collective investment funds offer exposure even for those of modest means.
Collective investment funds will invest money in one of two ways: directly or indirectly. Both spread the risk, although direct investment in bricks and mortar is less vulnerable to the whims of the market than 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.
There are risks associated with direct property investment. In 2008, when America’s sub-prime mortgage crisis sent waves of panic around the world, the value of some commercial property funds in the UK fell by up to half.
Indirect investment funds, i.e. those that simply buy and sell shares, normally take the form of unit trusts and open-ended investment companies (OEICs). With unit trusts, the fund is split into units, rather than shares, the price of the unit having a direct correlation to the value of the assets held by the trust. OEICs are run as companies, so investors will buy and sell shares as opposed to units. Again, the share value will directly reflect the underlying value of the investment.
Property investment funds can be either open-ended or closed-ended. Open-ended investments may issue or redeem any number of units (in the case of unit trusts) or shares to their members at any time; the underlying assets are simply added to or sold off according to demand. This can lead to problems if someone wants to exit at a time when the value of assets is low.
The majority of open-ended funds are also real estate investment trusts. In essence, this means that they don’t pay corporation tax on assets, as long as they pay at least 90 per cent of profits to their shareholders. Dividends are taxed at either 20 or 40 per cent.
Closed-ended investment trusts differ in that a fixed number of shares are issued when they’re set up. These are subsequently bought and sold on the stock market. The fact that the fund manager doesn’t have to sell assets to buy back shares adds an element of stability that unit trusts and OEICs don’t enjoy. The tax on dividends is 10 per cent for basic rate payers and 32.5 per cent for those on a higher rate.
Commercial property prices are now recovering after the sub-prime mortgage crisis of 2008, and an increase in revenue from rents is expected as economic conditions improve. Furthermore, the recent lack of investment in property should increase the value of existing buildings.
If you are interested in knowing more about commercial property development, check out the site. house market blog has all the up-to-date info on commercial investment , public houses and property news.