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Building blocks

An investor seeks advice on the best way to invest in property

heard lots about investing in property and, with the ongoing rise in house prices, I would like to benefit from investing in property. I do not know whether to buy a property to rent out or to invest in a property fund.

The appeal of buy-to-let properties is obvious. It is easy to understand the mechanics and it involves a tangible asset.

As we know, many people see the purchase of a second property to rent out to tenants as an investment. However, there can be problems as many clients do not bother to take up full references and end up with unpaid rent or damaged property.

Some are unfortunate enough to buy property in areas where prices fall, undesirable neighbours move in or subsidence occurs. When buying just one property to rent out, all these factors can make buy-to-let property a high-risk decision.

From January 2007, we will see the introduction of UK real estate investment trusts which will offer tax transparency and, for the first time, the opportunity for UK investors to invest in all types of property from offices to nursing homes, car parks and shopping centres.

Reits are a very different proposition than buying a single property to rent out. They will allow investors to invest in property in a diversified way.

Most Reits, at least initially, are likely to comprise commercial property. A few residential Reits may be available.

The introduction of Reits offers investors the chance to benefit from the upside of predominantly commercial property investment without the downside inherent in buy to let.

You could say this is like comparing apples and pears but an investment in a blue-chip quoted property group which has converted to Reit status or a collective investment scheme investing in Reits offers investors a less risky investment than a buy-to-let property investment. According to the Council of Mortgage Lenders, there have been 375,000 buy-to-let loans advanced since the beginning of 2005.

UK commercial property is an important asset class that is increasingly popular with investors. According to Lipper, compared with other investment choices, as an asset class, commercial property has outperformed equities and bonds over the last three, five, 10 and 15 years.

The estimated value of the institutional commercial property market in the UK is 353bn, according to September’s Investment Property Database monthly index.

Investing in a collective investment scheme such as an Oeic, unit trust or investment trust that invests in Reits gives investors an opportunity to diversify their portfolios.

In some market conditions, property prices can increase while shares and stocks decrease in value. Obviously the reverse can also be true. However, history shows that commercial property prices have been less volatile than share prices and better able to withstand market downturns.

The question becomes which property fund should you invest in and which financial product is the most appropriate to get access to property investment?

Despite the Chancellor’s Uturn on self-invested personal pensions having residential property as an investment, Sipp investors will be able to invest in a residential Reit, which may be suitable for you, being a higher-rate taxpayer.

Whatever route you choose, I remind you again that the basic aims of financial planning always apply – to create financial independence for the individual and their dependants. This applies to all people, regardless of their status.

Financial independence comes when the property in which you live is paid for and there is guaranteed after-tax income greater than budgeted expenditure.

Successful construction of an investment portfolio depends on a variety of things but hinges on buying the right assets and maximising the tax efficiency and security of investments to match your risk profile and investment outlook.

Kim North is a director of Technology & Technical

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