Property investment is very popular and usually involves direct investment – buying a physical property – or investment through a property fund.
You may already have a substantial stake in property through your own home, and it’s likely to be one of your biggest investments. Direct property investors buy properties to let, develop or sell. Property funds pool money from several investors and invest the money on their behalf usually in commercial property (offices, shops, warehouses, factories) and land. Managers of these funds may also be involved in property development. Returns on the funds are set by changes in the market value of the properties held by the fund and any rental income.
Before you choose an investment, you should be aware of the possible rewards and be comfortable with the level of risk involved.
Like equities, property has historically given investors better returns than low-risk assets, but you need to take a long-term view. Though slightly less risky than equities, property tends to perform differently – there may be a property boom when the stock market is in a slump, or the other way round. Property investment delivers income through rents which can increase over time, meaning income paid to investors can grow, though this cannot be guaranteed. Investing in property funds means that together with the other contributors you can invest across a range of properties that wouldn’t be possible if you were simply buying property direct.
The main risk to direct property investment is a fall in the property market, leaving you with a property worth less than you paid for it – negative equity. Property prices are also influenced by interest rates, for instance higher rates can bring prices down and slow property sales as owners cannot afford higher mortgage repayments. This could also mean that selling the property quickly to get your money back is not possible.
Investing your money in a property fund can limit some of these negative effects, as the fund manager usually keeps a cash or ‘liquid’ reserve to meet the demands of investors who are looking to sell. But if several investors want to sell at the same time as you and the liquid reserve isn’t big enough, the manager can be forced to sell the whole investment to pay you all. So you may not get back what you were expecting or have to wait a long time before you get any money back.
The value of investments and the income from them may fall as well as rise and cannot be guaranteed. Investors may not receive back the full amount originally invested. Past performance is not an indication of future performance.
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