Property

Investment in commercial property can offer features of investing in equities (shares of ownership in a company) and bonds (loans, usually taken out by a government or company, which normally pay a fixed rate of interest over a given time period, at the end of which the loan is repaid) – it generates income through rentals and also offers the potential for capital growth.

Spin-free guide to property

An in-depth look at property investing

Spin-free guide to property

Property investments can be harder to buy and sell when compared to investments in fixed income securities and shares. Commercial property is a specialised sector. The value of an investment in commercial property is not fixed and you may not get back the amount you originally invested. The level of income is not fixed and may vary.

There is no guarantee that the value of property assets will increase. You should contact a financial adviser if you have any doubts about investing in a specialised sector such as commercial property.

Property is a physical, tangible asset – ‘bricks and mortar’. When you buy a property, you’re not just buying the structure of a building. You’re also buying an interest in the land that the building sits on. This is a key factor in the long-term value of property.

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The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested. 

Residential and commercial property

The property market is split into two main areas – residential and commercial.

Residential property includes:

  • buy-to-let
  • owner-occupied
  • second or holiday homes

Commercial property includes:

  • office buildings and business parks
  • retail space, such as shops and shopping centres
  • industrial property, such as warehouses and factories

When you buy an investment property, you can generate income from regular rental receipts. You also have the potential for capital gains when you eventually sell. When it comes to letting residential property, lease periods tend to be very short – typically six months or a year – so your rental income can be uncertain and potentially volatile (when the value of a particular share, market or sector swings up and down fairly frequently and/or significantly, it is considered volatile). It’s also usual for residential properties to have ‘void periods’ when they are vacant while you look for new tenants. This means that income from residential lettings may be unreliable.

The income that can be generated by commercial property represents a more stable alternative to income than can be produced by residential property. This is because:

  • it usually involves much longer lease contracts, often as long as five to ten years
  • corporate tenants are generally more reliable than residential ones
  • they are far less likely to fail to pay their rent
  • they tend to give longer notice periods when moving on

Commercial property, however, is usually the preserve of larger institutional investors because of the sums of money involved. Commercial properties can also be difficult to sell quickly.

There are several ways to invest in property:

  • directly – buying and managing properties yourself
  • equities – buying shares in companies that own and manage property and often are also involved in property development
  • funds – investing in a fund which invests only in physical property, or in a mix of direct property and equities, or in equities alone

As a private investor, one way to benefit from the unique advantages of commercial property investment is to invest through a property fund.

Diversify into bricks and mortar

Unlike residential property, commercial property has only recently moved within the reach of the average investor through the introduction of property funds.

Investment in commercial property provides the opportunity to diversify your portfolio, as it has a very low correlation with the performance of other asset classes over the long term.

Furthermore, commercial property doesn’t react in the same way as other asset classes to changing economic conditions, so adding it to an investment portfolio can help to create a well-rounded portfolio for many investors.

Commercial property is a specialised sector, so you should contact a financial adviser if you have any doubts or questions about investing. The value of an investment in commercial property is not fixed and you may not get back the amount you originally invested. There is no guarantee that the value of property assets will increase.

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