The launch of UK Reits has added to the choice and attractiveness of property investment especially with tax transparency now innate in each Reit. But as more on and offshore property funds become available the complications of choosing which property fund or Reit constitutes best advice increases for advisers.
I think there are fabulous stories emerging as the quoted property sector opens up to retail financial services. Upon conversion to a Reit, Land Securities, the biggest UK-quoted property company owning over seven million square metres of accommodation worth over 14.5bn, becomes the third-biggest Reit in the world.
Looking at the financials, many of the quoted property companies have long histories of increasing dividend growth which makes this sector hard to ignore.
As can be seen in US, specialist Reits are popular and in the UK the future activity of pubs, prisons and housing associations and such like converting to Reits adds to the attractiveness of property investment for sophisticated investors.
On the other side of the fence, buy-to-let investors are confident in the future of residential property. According to the Association of Letting Agents, six out of 10 landlords are planning to acquire more property.
The research shows that the average buy-to-let property has a lifespan of over 15 years. The North-South divide is widening in terms of house prices but, for the first time ever, average house prices throughout the UK have broken through the 100,000 barrier, with the biggest growth being seen in Scotland and Wales.
According to the Homebuyer Show, 90 per cent of people believe that house prices will continue rising in 2007. I am not convinced myself, as interest rates rise.
The difference between buy to let and property fund investment is like comparing apples and pears. Clients need to understand the risks in both. I will happily share my own buy to let stories, one of my worst experiences was back in the late 1980s when interest rates were heading towards 15 per cent, I was in negative equity and could not sell my flat and was forced to rent it out.
Within a year, I was in the courts evicting the tenants who decided to stop paying rent and squat. And no – the property was not in my home town of Liverpool but in the fine home county of Surrey.
When clients without any property management experience who had little understanding of electricity, gas or building maintenance, sat and told me they were investing all their hardearned cash in a property to rent out, I would squirm.
When buy to let goes well, yields can be over 10 per cent with substantial capital uplifts. It is, however, a surprise to some that they cannot offset the stamp duty on purchase and they will lose 40 per cent of their profit through capital gains tax when they sell the property.
I sat in a pub earlier this week with a good friend of mine who argued that so much financial services information is available on the internet, why does anyone need financial advisers?
He proudly announced that his choice for regular investment this year is China. I have a small bet on with him that in three years time he will have wished that he had invested in UK property when guided by a financial adviser.
As the excellent study by Axa demonstrates, when people are guided by a independent financial adviser they can save thousands in tax and achieve capital growth matching their risk outlook. When people’s finances are not professionally managed – the reverse results are achieved. We all should remember that the basic aim of financial advice is to help clients live in the home they wish to, debt free and live the lifestyle they wish for both in sickness and in health (within reason).
Kim North is director of Technology & Technical.