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FAQs

Here we list the most common questions normally asked regarding property investment, together with succinct answers. We also cover some property and fund related technical terms on our Glossary page.
  • Are we really becoming a nation of tenants?
    • The shortage of mortgage finance, rising house prices over the last decade, and failure of household incomes to keep pace with inflation have all contributed to the shift towards private rental.
    • Savills have published a couple of reports recently: Their Rental Britain report from March 2012, and their Residential Property Focus Q2 2012 show a number of interesting findings:
      • In the 5 years to the end of 2011, the value of rental properties stood at £840bn (up 42%), and number of rented households was up almost 50% (4.8 million from the previous 3.4 million).
      • Private rented properties now equate to approximately 20% of the value of UK housing stock.
      • They estimate that 5.9 million households will be rented by 2016
      • An estimated £200bn of new rental properties are required over the next 5 years in order to keep pace with demand, but only approximately £50bn of this will come from private ‘buy to let’ investors.
      • 37% of tenants had been renting for five years or more
      • 22% of tenants expect to be renting for more than 3 years
    • Research by the Council of Mortgage lenders and Santander concluded that the average unassisted first time buyer is 33 years old, and the average first time buyer deposit is £37,375 (17%).
  • How can residential property be classed as an investment asset?
    It exhibits all of the fundamentals one looks for in an investment asset, and more:

    • Favourable long term supply / demand characteristics
    • Generates income as well as potential capital growth
    • Uncorrelated with other mainstream assets
    • Tangible
    • Diversified in terms of geographic location and type / size
  • How liquid is residential property?
    Generally more liquid than commercial property as residential assets tend to be of a lower lot size, and trade in a larger, more active market.
  • Is now a good time to invest in residential property?
    • It is difficult to ‘time’ any market – whether equities, fixed interest, property, etc. ‘Time in the market’ rather than ‘timing the market’ is generally considered to be the most consistent approach for medium to long term strategic asset allocation, and residential property investment is no different.
    • Yield should be a significant factor when considering investment assets, and with the increasing trend toward private renting, residential property investment is an attractive asset class.
  • My client has capital invested in their family home. Why would they want more residential exposure?
    • The main home is not generally considered to be an investment: it is a place to live, and does not generate any income whilst occupied as a primary residence.
    • One property represents a very  high concentration risk if this represents an investor’s only residential property investment asset.
    • An investor’s primary residence cannot be held within an ISA or SIPP wrapper.
  • The costs involved in managing a portfolio of residential properties must be huge.
    The secret here is to utilise a specialist property manager which has the  infrastructure to operate on a national basis. Economies of scale bring the average cost of managing each asset down to a level that makes a large residential property fund viable.
  • Valuing a large portfolio of properties each month will be impossible, won’t it?
    • A full, physical valuation on a monthly basis will not be possible.
    • The collective investment schemes rule book (the COLL handbook) dictates that a physical valuation must be carried out at least once per year. These will be done initially when a property enters the portfolio, and then at intervals not greater than every 12 months thereafter.
    • Interim valuations will use the ‘desk top’ method, whereby local transactional data and knowledge is employed by the independent valuer based on the last full physical valuation.
  • What are the differences between the various House Price Indices (HPI) I see quoted?
    • There are broadly three types:
      • Estate Agency HPIs (Rightmove, Hometrack) – which reflect prices properties are listed by the participating estate agents. This could be seen more as a measure of vendor sentiment than a true measure of house prices.
      • Mortgage Lender HPIs (Halifax, Nationwide) – which reflect the prices agreed for properties they have made mortgage offers upon. Their lending policy, and fact that the numbers will only be a fraction of the market will inevitably mean variance with the whole of the UK market.
      • Completed sale prices (Land Registry, Acadametrics) – more accurately represents the true value of properties as all sales are recorded, even cash only transactions. Land Registry figures do tend to be delayed by up to a month because of the reporting window.
  • What are the two authorised legal structures for authorised funds in the UK?
    They can either be Unit Trusts or Open Ended Investment Companies.
  • What are they key benefits in a property fund compared with buying a property myself?
    • Greater diversification can be achieved, as investors pool their capital and the fund can buy a wider distribution of properties both in terms of type and location.
    • Less capital needs to be employed – an investor could buy into a retail fund for as little as £1,000 and gain exposure to properties all over the UK.
    • Lower impact of void periods. If an investor owns just one property, they will receive no income from that property if they have no tenant (the property is ‘void’). With a fund investing in a number of properties, void issues with one property has less impact on the rental income.
    • A fund may have access to more competitively priced property management services, be able to negotiate discounts on acquisitions, and have more market information available to them compared with the average personal ‘buy to let’ investor.
  • What costs are involved when buying a property?
    Stamp Duty Land Tax (SDLT), conveyancing costs, Local Authority searches, and valuations.
  • What do the terms, ‘Regulated’, ‘Authorised’,‘Recognised’, ‘Unregulated’, and 'Unauthorised’ mean?
    These terms refer to the UK Financial Conduct Authority’s (FCA) involvement with collective investment schemes (CIS) being promoted in the UK:

    • Regulated:  CIS which may be promoted to mainstream UK retail investors – either UK domiciled funds which the FCA has authorised, or offshore domiciled funds which the FCA have recognised as being subject to equivalent UK prudent standards of regulation.  Regulated funds qualify for Financial Services Compensation Scheme in the UK.
    • Authorised: A UK domiciled fund which the FCA has been authorised for promotion to mainstream retail investors.
    • Recognised: An overseas domiciled fund which the FCA recognises as being subject to regulation equivalent to that in the UK for authorised funds. A form of passport into the UK so the fund can be promoted to retail investors.
    • Unregulated:  A CIS which neither authorised or recognised by the FCA for promotion to retail investors. May be a UK unauthorised scheme, or an offshore domiciled fund that does not meet the prudent spread of risk requirements that would be appropriate to retail investors, or may employ high levels of gearing.  Aimed at HNW, sophisticated or professional / institutional investors. These funds will not qualify for UK Financial Services Compensation Scheme.
    • Unauthorised: UK based fund which does not meet prudent spread of risk requirements to make it suitable for promotion to retail investors. Aimed at HNW, sophisticated or professional / institutional investors. These funds will not qualify for the UK Financial Services Compensation Scheme.
  • What is ‘Gearing’ or ‘Leverage’?
    Where additional asset exposure is obtained through employing borrowed capital. This can take the form of mortgages secured upon the properties themselves, or by unsecured borrowing within a fund. The borrowing has the effect of gearing or leveraging the returns on investment capital, thus exaggerating the volatility of asset returns. For example, a fund which employs £1 of debt finance for each £1 invested can buy £2 of assets. So, ignoring costs and interest, a 10% growth in asset value represents a 20% increase in the £1 invested. Equally, a 10% fall would mean a 20% loss on invested capital.
  • What is a NURS?
    A Non-UCITS Retail Scheme. A fund which is authorised for promotion to retail clients, but does not qualify under the UCITS (Undertakings for Collective Investments in Transferable Securities) directive. As physical properties are not ‘Transferable Securites’, a UCITS fund cannot hold bricks and mortar properties. NURS funds are able to hold physical assets.
  • What is a PAIF?
    • Property Authorised Investment Fund. A tax designation that a UK authorised OEIC can obtain and as a result not suffer the usual 20% internal rate of corporation tax on its property investment business that would apply to one without PAIF status.
    • PAIF status can apply to an OEIC which is authorised as a non-UCITS Retail Scheme (NURS), or a Qualifying Investor Scheme.
  • What is a UK REIT?
    A UK Real Estate Investment Trust. This is a form of Investment Trust that invests mainly in properties / real estate (commercial or residential) that are rented out, and distributes the majority of the rental income to investors.
  • What is an AST?
    Assured Shorthold Tenancy agreement: the most popular tenancy arrangement in the private rental sector since it was introduced the Housing Act 1988.
  • What is correlation?
    A measure of how closely the returns of one asset relate to another asset.
    • Range from -1, through 0, to +1
    • -1 = Perfect negative correlation, so Asset A moves at the same time by the same percentage as Asset B, but in the opposite direction. Negates volatility, but also negates returns.
    • 0 = No correlation, as Asset A and Asset B movement and timing are completely unrelated. Ideal for achieving diversification of a portfolio.
    • +1 = Perfect positive correlation, so Asset A and Asset B move by exactly the same percentage at exactly the same time. Combining these assets will not reduce volatility.
  • What is negative equity?
    A term that describes the situation where the value of a property is less than the mortgage secured upon it. This has been a problem in the past where buyers purchased their homes with high loan-to-value mortgages, and a fall in property values ensued.
  • What is SDLT?
    Stamp Duty Land Tax, payable on a sliding scale by the purchaser on property purchases or transfer of title. Different scales apply depending on whether the property is residential or commercial in nature.
  • What is the Sharpe Ratio?
    A calculation designed to quantify the return achieved per unit of risk taken in relation to an investment. Derived in 1966 by William Sharpe, the formula is:
     (Asset Annualised return – Risk Free Annualised Return)
    Volatility
    Where :
    • Risk Free relates to Cash returns
    • Volatility = Standard Deviation of annual returns of the asset
  • What is the difference between Open- and Closed-ended investments? Why is this significant?
    • Open Ended investments are ones which can create or cancel units / shares according to whether money is flowing into or out of the fund. A manger of an open ended fund builds a liquidity management process into their investment strategy so that the fund can meet requests for redemptions. The value, or price, of the shares reflects the value of the assets held within the fund.
    • Closed Ended funds issue a fixed number of shares, and typically do not have an in-built liquidity strategy. This is because the shares are traded on a secondary market: should an investor wish to realise the value of their investment they have to sell their shares to someone who is willing to buy them. This does mean that supply and demand factors come into play with regard to the value of those shares – the price is not determined solely by the value of the underlying assets. As a result, closed ended investments tend to be more volatile than open ended ones.
  • Why all the issues with recommending unregulated (UCIS) funds? They’re ‘unregulated’ after all.
    Although a fund may be unregulated, the provision of advice is a regulated activity so can only be carried out by an authorised person under the terms of the FSMA 2000. The Promotion of Collective Investment Schemes (PCIS) order within the FSMA 2000 and section 4.12 of the Conduct of Business Sourcebook (COBS) dictate who UCIS can be promoted to.
  • Won’t buying residential property in a SIPP trigger punitive tax charges? Even if it’s in a fund?
    No. HMRC rules broadly state that residential property can be held within a pension as long as the property is held within a ‘genuine diverse commercial vehicle’, and it has not been acquired for the purpose of allowing the member to occupy the property. A fund, such as an authorised OEIC satisfies the HMRC requirements.
  • You can’t hold residential property in an authorised, daily traded fund can you?
    Yes, you can. There has never been legislation that prohibited an authorised fund from holding residential property. There were issues that made it unattractive, but the introduction of Assured Shorthold Tenancies and subsequent growth of large scale property management companies, and introduction of the Property Authorised Investment Fund regime have removed the barriers to large scale investment funds entering the market.

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