The value of your investment can go down as well as up and you may get back less than was paid in. Past performance isn't a guide to future performance. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK also have an impact on tax treatment
There are two main ways to invest in commercial property
Typically in the investment world when we talk about property investing we mean commercial property – in other words, buildings and land used by businesses.
Because of the high costs involved with buying and managing commercial property, most people invest either through direct property or indirect property investments. Each of these has its own benefits and risks.
The benefits and risks of direct property investment
Direct property investment is where you put your money into a fund that invests in a portfolio of properties. A fund manager will choose where to invest and manage your money on your behalf, pooling it with other investors’ money. This means you benefit from the fund manager’s expertise and knowledge of the property market, greater diversification and the financial advantages that could come with this.
It's a way of balancing out risk
Historically, commercial property has performed differently to other asset classes, like equities and bonds. This is because the way that commercial property is valued is very different from other asset classes and is less likely to be affected by changes in the stock market. So it can be a good way of diversifying your overall investment portfolio and balancing out the risks of other types of investments.
It can provide a regular and long term income
Income is usually the main source of returns from commercial property investments, and it comes in the form of rent paid by tenants. Commercial property leases tend to be longer than for residential property, meaning there’s more likelihood of a regular stream of income for a longer period of time.
You can get steady long-term returns
Over the longer term, commercial property could provide good returns. As we’ve explained above, income is usually the main source of returns, but returns can also come from increases in the values of properties when they’re sold.
Property can take a long time to sell
One of the main downsides is that, like residential property, commercial property can take a lot longer to sell than other types of investments. As its value is based on a valuer’s opinion of what it’s worth, it can’t always be sold when it needs to be or at the price wanted. This can be a problem for direct property funds if a large number of investors want to take out their money at the same time.
When this happens, fund managers can set restrictions on investors taking money out to give them an opportunity to sell properties for the best possible price. This can help protect the value of their funds for all investors. In some cases, investors may have to wait months before they can take their money out.
So it’s important to be aware before putting your money in direct property investments that there may be times when you can’t access your money immediately.
The benefits and risks of indirect property investments
Indirect property investment is where you invest in the shares of companies that own, manage or develop property, or in a fund that invests in a range of property companies. Investments of this type can behave in similar ways to equity investments and can offer good growth potential. As you’re investing in shares, indirect property is more likely to be affected by changes in stock markets than commercial property.
However, they also tend to be more likely to go down or up in value than other types of investments. A popular type of indirect property investment is real estate investment trusts (REITs).
Real estate investment trusts (REITs)
REITs can be an attractive investment option. They can pay a high level of dividend payments and, as they tend to have long lease agreements, they can offer a relatively stable income stream. As with any company that’s listed on a stock exchange, you can invest in a REIT direct, or through a fund.
Most of the UK’s largest property companies have become a REIT since they were launched in this country in 2007. There are certain requirements for becoming a REIT:
- At least 75% of a company's profits must come from property rental
- 75% of its assets must be involved in property rental
- They have to pay out 90% of their property rental income to their shareholders as dividends
In return for these fairly stringent restrictions, REITs don’t pay any corporation or capital gains tax on the properties they invest in.
However, it’s important to be aware of their risks too. As REITs pay out so much of their profits as income, they don’t have much left to reinvest in new properties and so to expand as a company. If they want to do this, they either need to borrow money or create new shares. This can end up reducing the capital value of existing investors’ holdings and means that the REIT is holding more debt.
This information is to help you understand more about commercial property and why you might want to invest in it. Please remember though that the information here shouldn’t be regarded as financial advice.