Investment opportunities in property

The place we call home is potentially the most valuable asset that we possess. Malta's size being what it is, appreciation on direct property investments have contributed in a small way to the rate of return on property investments. One of the biggest barriers to direct property investment is the very large amount of money necessary to get onto the famous 'property ladder'.

This article will have a brief look at what financial options are available to investors who would like to gain some exposure to property markets. In practice, there are many ways to invest in property related financial vehicles, but the potential returns are directly related to and influenced by

• Inherent risks

• Timing and liquidity

• Diversification.

Inherent risks

Although the subject of risk is very wide, for the purpose of this article, we will concentrate on

Risk of little or no return on original investment
This will arise if the investment does not produce any distributable or accumulated income, without any loss of the original capital invested

Risk of capital loss
This is the biggest risk of all, i.e. losing the money you have invested either because of economic or of business-related reasons. The bottom line is that some or all of your hard-earned money is irretrievably lost.

Currency risk
If one invests in a currency other than his/her home currency, exchange rate fluctuations can erode part of your capital and/or income. It can also work the other way round, and a gain is made. It is, however, essential that an investor understands the effect of investing in 'foreign' currencies.

Timing and liquidity

We all know that markets of all asset classes move up or down and that getting into the market at the right time makes a lot of difference to the total value and return of investments.

Investments (as opposed to savings) should generally be done over the medium to long term and property investments are no exception. In fact it is important to state that, in the case of property-related investments, the period should not be less than three or four years, as a bare minimum.

The term liquidity, in terms of property investments, is a very important factor not least of all because direct investments into property are somewhat different to buying and selling in, say, a financial market.

Generally speaking, financial assets (stocks and shares) can be sold relatively quicker than, say, a block of flats. Consequently an investment into property-related investments should be considered particularly suitable in a portfolio of investments.

Property investments for investors

So, is it possible for a salaried person to explore investments into the property markets?

The answer is yes, and the following facts or mitigators will address the risks or characteristics related to property investments, that have been mentioned earlier.

(a) Risk of capital loss

It is possible to find an investment product which includes capital protection. This means that the risk of losing your money is identical to the risk of the product provider not honouring their obligations.

The investor's view of the product provider's strength is the main deciding factor. Capital protected investments are usually tranche based, i.e., they are only available for a specific period, after which they are closed to further investment.

The investment will normally run for a specified period in years and is sold (to the investor) subject to specific terms and conditions. It is not unusual for these types of products to have returns expressed either as interest income or as capital appreciation payable at the maturity of the product.

On the other hand, open-ended investments are not normally capital protected and are intended for investors who understand (or are ready to accept) risks related to investments in general and to property markets in particular.

This type of approach (i.e. open-ended) can take different forms, such as a Professional Investor Fund (PIF) i.e. an investor puts up an amount of money (usually about US$20,000 minimum) and buys the expertise of a fund manager who will manage the investment on behalf of all investors who have pooled their money in the fund. As an example the investments will be direct property investments.

A simpler, less expensive method (with no minimum investment) would be to consider buying into an Exchange Traded Fund (ETF) which is equivalent to an equity investment (shares) which tracks a group of shares in a similar business on market.

In our case the ETF would shadow the value of a group of property company shares or an index of property shares. The biggest advantage of this type of investment is the frequency of trading (i.e. daily) and the relatively low cost of trading, particularly when compared to an open ended fund.

(b) Timing and liquidity

One of the most effective ways of maximising opportunities is to get investment timing right. This can be achieved by saving/investing amounts regularly. By way of example, rather than invest Lm1,200 into an investment in one go, there are options available to invest Lm100 per month.

Over a year, the same amount of money would have been invested, but using a 'pound cost averaging' approach smooths out the volatility (or movements) of any given investment market. Over the long term a monthly savings plan will enable an investor to maximise market movements to the investor's long-term benefit.

Needless to say, selling a property (be it small or large) will usually take at least a period of some weeks between the period when the price is discussed and the money is passed over from buyer to seller.

Consequently investments in open-ended property investment funds are normally done at, say, monthly or quarterly 'dealing dates' to reflect the nature of the underlying asset transactions. This is opposed to a financial instrument such as a bond fund where investors can normally deal with the fund manager (who deals on the open market) daily.

(c) Diversification

Diversification is a measure of how much investments are spread over geographies, markets, classes of asset, maturities and currencies. The bigger the spread, the better risk is managed, but there is also an element of grasping opportunities in new markets while tempering the whole exposure with investments in more stable markets.

For example, while the UK property market is probably the most developed in the world, there could be significant growth opportunities in, say, Eastern Europe, the Middle East and other countries around the world. Consequently, a well diversified approach can bring the opportunities and benefits of both stable and new markets.

It is possible to seek exposure either to specific countries or regions or global property markets.

The market entry levels for direct property investments (in any market) can be prohibitive for a large number of people. Additionally direct property investment requires

• Not insignificant legal and property agents' costs and

• A level of expertise which is not normally displayed by the small/medium investor.

There are, however, several means how investments in the (financial) property market can be accessed via financial products investing directly or indirectly into property.

The basic tenets of sound investment strategies are still applicable and additionally some specific aspects also to be taken into consideration when considering property-related investment opportunities.

It is therefore possible for different types of investors (be they small or large) to seek assistance from fully trained and licensed financial advisors in the pursuit of property-related investments.

This article is not to be construed as investment advice. HSBC is licensed by the Malta Financial Services Authority to operate investment services and is registered as a sub-agent of HSBC Life Assurance (Malta) Ltd.