Why invest in property?

Background

For many people, one of the assets that has grown in value for them over the past decade is their own home. In addition, the tangible characteristics of property can be extremely appealing - even to the most sophisticated investors.

As property investment has become increasingly popular, investment vehicles and options have proliferated. For serious investors and their advisers, issues that need to be addressed include the appropriate level of exposure, direct or indirect investment strategies, the most suitable investment vehicle and the pros and cons of investing in residential and commercial property.

back to top

Direct or indirect?

Direct property investment means the investor personally invests in one or more properties or part of a property (eg, a medical practice or student halls of residence). Indirect investment means the investor buys shares in a property company or invests in a property investment vehicle like a unit trust or life fund.

A robust rental sector, the ability to achieve vacant possession with relative ease and strong capital growth have encouraged many individuals to directly invest in the residential buy-to-let market. Direct investment in commercial property, however, is less attractive to the majority of private investors because of the high cost of entry and the emphasis on sustained return growth through income rather than capital gains.

Indirect investment has the advantages of allowing access to a diversified property portfolio, greater liquidity and no direct management responsibilities.

back to top

Residential or commercial?

While investment in second homes, holiday homes and buy-to-lets have long been attractive options for many people, there are currently only limited opportunities for individual investors to invest in commercial properties. It is important to understand the distinctions between the two sectors.

What's the difference?

For many individual investors, property investment is linked to the purchase of a second home or a buy-to-let property. Over the past couple of years, the latter approach has become increasingly popular, with the Council of Mortgage Lenders estimating that, in 2005, outstanding loans for buy-to-let residential properties exceeded £25 billion.

Because of the size of the investments required, investment in commercial properties has tended to be the domain of property companies and institutional investors.

It is important to take account of the major distinctions between commercial and residential property investment:

• tenants of residential property are typically committed to relatively short renewable leases, but commercial tenants typically sign long-term contracts with periods in excess of ten years not being uncommon
• tenants of commercial property are typically liable for repairing the property but landlords of residential property usually remain responsible for repairs
• returns from residential property have largely been linked to rapid increases in house prices, whereas the significant component of commercial property return tends to arise from income.

back to top

For your information

Please note, the information contained on this website is only for your general information and use and is not intended to address your individual requirements. In particular, the information does not constitute any form of advice or recommendation by the group and is not intended to be relied upon by you in making (or refraining to make) any specific investment or other decisions, and also does not constitute any form or advice or recommendations to be passed on to any third parties. Appropriate expert independent advice, and/or independent research should be obtained before making any such decision.

The value of investments and the income derived from them can go down as well as up, and you and/or any third parties you may be advising, may not necessarily get back the amount you/they invested. Past performance of an investment is not necessarily a guide to its future performance. It may be difficult for you or any clients you may be advising to sell or value certain investments or to obtain reliable information about their value or the extent of the risks to which they are exposed. The value of investments may rise or fall due to the volatility of world markets, interest rates and capital values or, for investments held in overseas markets, changes in the rate of exchange in the currency in which the investments are denominated.

Any arrangement made between you and any third party is at your sole risk and responsibility.