Why invest in property?
Performance measurement
Property is a total return investment, and performance is measured as a combination of income and capital growth.
Performance can be measured for the whole property market and for the core sectors. Typically, performance is measured for ungeared returns, and can be compared with other asset classes.
For more information and to compare commercial property performance refer to IPD www.ipd.com
Residential property produces rental income as well as capital growth, and is a total return investment. However, as most investors require sales of their properties to generate returns, the key publicly available information sources from HBOS and Nationwide report movements in house prices, rather than total return.
Further information
For more information refer to HBOS or Nationwide
back to topThe two links below will take you to areas on the the Investment Property Databank (IPD) site where you can see past performance of residential and commercial property.
Property should be a medium-return, medium-risk investment. According to figures1 from long-term investors such as pension funds, the expectations for long-term, real returns from the major asset classes are likely to be in the region of:
- Equities - 4.5%
- Alternative assets - 4.5%
- Property - 3%
- Fixed interest products - 2.5%
- Index-linked investments - 1.5%.
1Source: Universities Superannuation Scheme limited - statement of investment principles - 31.07.08)
The length of time you plan to hold a property investment is one of the things you should consider carefully before making the investment.
This is particularly true for direct property investment, which is typically very illiquid and has high transaction costs. So, the cost of making your investment and the time it takes to buy and sell it are significant factors - and, under normal circumstances, are unlikely to be recovered in less than five years.
For indirect property investments, particularly those listed publicly, the entry and exit costs are much lower, and the time taken to buy or sell shares in a property company is measured in minutes, not months. However, it is still true that property should be considered a long-term investment. If the objective for investing is sustainable income, it makes sense to hold these shares for long enough - maybe for up to five years - to deliver valuable returns and to gather any capital growth.
For investors debating whether to hold direct or indirect property, a 2009 study by Morgan Stanley indicated that for periods of less than 18 months, shares in listed property companies and REITs performed more like equities than direct property. However, for periods of more than 18 months, this was reversed, so that in the longer term indirect property investments are a good proxy for direct investment.
Further information
Property shares make a good proxy for direct property - Morgan Stanley
The value of commercial property is assessed by a professional valuer, and is based on relevant previous transactions and other market evidence. For public companies and many funds these values are published regularly, usually every three or six months. Valuations of privately held property assets may not be publicly available, in which case a good insight into price movements and trends can be sought from data gathered together and published in indices. (See question on indices for more information.)
However, investors should take care when interpreting valuations from indices, as these assume the property is being sold rather than held for investment purposes.
Valuations also take no account of the debt associated with the property, which may be significant. Therefore, investors in commercial property often consider the Net Asset Value as the more important measure.
The uniqueness of many commercial properties makes direct comparison difficult, and valuations can, therefore, rely heavily upon the experience and market knowledge of the valuer.
The value of residential property is more easily assessed, although the skills of a professional valuer are still needed to assess the comparability of similar properties and the impact of market trends.
It is also important to remember that valuations become difficult whenever there is a lack of market activity to provide evidence to make comparisons.
The value of an indirect property investment is based on three factors:
- The value of the assets held
- The impact the investment vehicle has on the value of those assets
- Tax costs associated with the investment vehicle that affect returns to investors
For example, the difference between the value of a property company's shares and the Net Asset Value of the properties that it owns is often loosely explained as being due to:
- The value (or cost) that management can add to the sale value of the properties
- Tax inefficiencies, such as corporation tax.
Other factors that affect the valuation of indirect property investments include:
- The frequency of valuation - shares are valued continually, whereas property portfolios are valued at set points in time
- The extent of future valuations - share prices reflect the expectations of the future, whereas with property portfolios the value reflected is the one that would have been realised if the assets had been sold.
However, in unstable markets, assessments of value (of all vehicles) are also much more likely to be uncertain, and to be affected by short-term sentiment.
In simple terms, price refers to the actual price that has been achieved for a property; value refers to an estimate of the price a property would fetch if it were sold: and worth is the price a particular investor would pay.
However, the ideas of value and worth are more complicated when dealing with property, particularly commercial property, because most properties are not commodities.In addition, individual properties are not sold so frequently that a clear market price can be identified at any moment - that contrasts with the position for shares that are traded on an exchange.
The role of the professional valuer is therefore vital in establishing the value of a property at a point in time. However, it should be remembered that a valuation is not a price, but an estimate based on expert knowledge and the application of consistent rules.
The worth of a property, on the other hand, is the price a potential buyer would be willing to pay, generally based on their perception of the returns the asset is likely to produce.
The UK has a particularly transparent valuations process (particularly for properties owned by public companies) in comparison with many other countries where valuations may not be so universally available.
Indices are vital in the commercial property market, as they provide a benchmark for comparison between companies, and a measure against which the performance of their properties (and, implicitly, their management) can be judged. The most widely used indices for direct commercial property performance are produced by Investment Property Databank (IPD) and for publicly listed property companies, including REITs, by FTSE / EPRA / NAREIT. These cover both the UK and many other territories. Other indices are produced for different sections of the market.
Futher information
See Reita's Databank section
