If you want to get into the real estate industry, there are two ways to do it. You can invest directly, by either buying a fund which holds physical property in its portfolio or by buying actual property yourself; or indirectly, by either investing in property companies, developers and house builders or in property security funds which invest in property companies. The decision to choose between these investment options should be entirely based on:
What You Can Afford
Direct investments are typically more expensive ventures than indirect investments. For instance, you can purchase a property for about £100,000 minimum in prime areas or buy a brick and mortar fund for roughly the same price while in indirect investments, you buy shares as investment. These shares might be available for as low as maybe £15/share, therefore reducing the initial investment capital. However, direct investments offer more returns because you keep all the rent as profit while in indirect investment, you, as a shareholder, gets a dividend which might be a small amount per share.
Where You Want the Property
Property is classified according to its location. Prime property is located in big towns and cities. It has a very high value and usually attracts wealthy tenants who can be able to afford the high rental or sale value. Investing in such property requires a high initial investment, especially if it is a direct investment. An indirect investment, though not as high as direct, will most likely require a large sum because the investment companies or funds might have high share values because of the value of the investment. Secondary and tertiary property is situated in smaller towns with less attractive surroundings and this makes it harder to attract wealthy tenants. Investing in them requires smaller initial capital because their value is lower than that of prime property. However, their returns are much lower with higher chances of defaults and a higher risk of having unoccupied periods.
What Is The Commercial Property Market Looking Like At The Moment?
The commercial property market is majorly determined by the forces of supply and demand. Higher demand means that commercial property value will skyrocket which is good for investors. In such a situation, it is better off for you to spend your money through direct investment because there is a higher chance of successful selling or renting, with the profit margins being huge. Lower demand on the other hand means that there is a lower uptake of commercial space and a direct investment would hurt you as an investor. Property companies and developers might be a better place to invest although they still lack diversity because you would only be investing in one company. Property security funds are the safest bet in such business conditions because they usually have a diversified portfolio and thus have a lower risk of being affected by a few hitches or setbacks such as unmet targets.
What to be aware of
As an investor, there are three major things that you should understand before making any investment. These are liquidity, volatility and diversification. During a market crash, open-ended funds, which characterize most brick and mortar funds, have a harder time liquidating their assets. Just like when you have bought the property personally, selling or renting it in such a situation is quite difficult and either you or the fund manager might end up selling at lower prices or hope for the best in a bidding process to get what you can salvage. In closed-ended trusts and property companies, liquidating assets is much easier because you only need to sell your shares in the stock market.
Direct property investments however are less volatile. They are less affected by market crashes than indirect investments and do not depreciate as much. Even though this seems all good, the lack of diversity might cause shortfalls on the return on investment in direct property investment. In case there is a slump for instance in buying or renting of shopping space in malls, this might hurt a direct investment because such a mall would have been the single source of investment that you invested in. Property security funds on the other hand, invest in multiple companies and projects and investing in them means that you have invested in a diverse portfolio. This portfolio might include hotels, office blocks and malls among many others. In case one sector performs poorly, the rest will still provide good returns.