At a time when cash savings are yielding negligible returns, many people are looking at investment funds as a way of making their money work for them. Commercial property, in particular, is predicted to deliver strong returns in the coming months. Obviously, none but the wealthiest individuals can buy a commercial property straight-out, so the way that most of us get exposure is through a collective investment fund which invests on behalf of its members.
Collective investment funds will invest money in one of two ways: directly or indirectly. Both spread the risk, although direct investment in bricks and mortar is less vulnerable to the whims of the market than indirect investment.
Direct investment trusts physically purchase a range of buildings of varying quality. Rewards are earned in the form of rental income from tenants and capital growth from the increase in value of the properties. A major drawback is the illiquidity of the market: it can take months to buy or sell a property. Furthermore, in 'exceptional circumstances' the fund manager is able to suspend trading for 28 days whilst they try to raise cash to redeem investors. This period may be renewed until money becomes available.
The portfolio of most direct investment companies is divided into prime, secondary and tertiary properties. This categorisation is based upon location, quality of the buildings, rental revenue and ability to attract tenants. Tertiary property, at the lowest end of the spectrum, offers the highest yields due to the risky nature of the investment.
Indirect investment funds are even more vulnerable to the whims of the market as they don't enjoy the same benefits of diversification. Most take the form of unit trusts and open-ended investment companies (OEICs).
Both unit trusts and OEICs are open-ended, in other words there's no limit to the number of units or shares that the fund manager can issue. If the demand for units increases they simply buy more property, and if an investor wishes to redeem their holding they sell them back to the fund. This can lead to problems, such as the fund manager having to sell assets at a low price, but it's more user-friendly than buying and selling shares on the stock market.
The majority of funds are classified as real estate investment trusts (REITs). They buy shares in other companies that have REIT status and don't have to pay corporation tax on their assets. In return, they pay at least 90 per cent of profits to shareholders who, in turn, pay tax at either 20 per cent (basic rate) or 40 per cent (higher rate).
Closed-ended investment trusts, on the other hand, issue a fixed number of shares when they're created. Members buy and sell shares on the stock market, ensuring that the fund manager always has a set amount of money at their disposal. Investment trusts can also take advantage of gearing to boost returns. The tax on dividends is either 10 or 32.5 per cent.
Commercial property prices are now recovering after the sub-prime mortgage crisis of 2008, and an increase in revenue from rents is expected as economic conditions improve. Furthermore, the recent lack of investment in property should increase the value of existing buildings.
Collective investment funds will invest money in one of two ways: directly or indirectly. Both spread the risk, although direct investment in bricks and mortar is less vulnerable to the whims of the market than indirect investment.
Direct investment trusts physically purchase a range of buildings of varying quality. Rewards are earned in the form of rental income from tenants and capital growth from the increase in value of the properties. A major drawback is the illiquidity of the market: it can take months to buy or sell a property. Furthermore, in 'exceptional circumstances' the fund manager is able to suspend trading for 28 days whilst they try to raise cash to redeem investors. This period may be renewed until money becomes available.
The portfolio of most direct investment companies is divided into prime, secondary and tertiary properties. This categorisation is based upon location, quality of the buildings, rental revenue and ability to attract tenants. Tertiary property, at the lowest end of the spectrum, offers the highest yields due to the risky nature of the investment.
Indirect investment funds are even more vulnerable to the whims of the market as they don't enjoy the same benefits of diversification. Most take the form of unit trusts and open-ended investment companies (OEICs).
Both unit trusts and OEICs are open-ended, in other words there's no limit to the number of units or shares that the fund manager can issue. If the demand for units increases they simply buy more property, and if an investor wishes to redeem their holding they sell them back to the fund. This can lead to problems, such as the fund manager having to sell assets at a low price, but it's more user-friendly than buying and selling shares on the stock market.
The majority of funds are classified as real estate investment trusts (REITs). They buy shares in other companies that have REIT status and don't have to pay corporation tax on their assets. In return, they pay at least 90 per cent of profits to shareholders who, in turn, pay tax at either 20 per cent (basic rate) or 40 per cent (higher rate).
Closed-ended investment trusts, on the other hand, issue a fixed number of shares when they're created. Members buy and sell shares on the stock market, ensuring that the fund manager always has a set amount of money at their disposal. Investment trusts can also take advantage of gearing to boost returns. The tax on dividends is either 10 or 32.5 per cent.
Commercial property prices are now recovering after the sub-prime mortgage crisis of 2008, and an increase in revenue from rents is expected as economic conditions improve. Furthermore, the recent lack of investment in property should increase the value of existing buildings.
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