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Most people who have bought their own home will realise that property can be a good investment – house prices have risen significantly in recent years, although this does not mean they will continue to do so. There is also a growing trend for people to invest in other properties, such as buy-to-let flats and holiday homes.
While this can be a good option for some people, there are a number of risks involved:
- property prices can fall
- mortgage and maintenance costs can be high
- there may be periods when a landlord cannot find suitable tenants
- large amounts of money are likely to be tied up in individual properties
- selling a property can take time which can cause problems if money is required quickly
Property funds
Investing in a property fund, rather than buying property yourself has many advantages:
- you can invest in smaller amounts
- it's generally easier to sell your investment if you need to
- your money will be spread over a large number of properties
- you won't have the inconvenience of handling the property deals yourself
- the worry of maintaining the buildings is removed
Of course, you are still exposed to the risk that there may be a downturn in the property market, but some funds reduce this risk by investing in several different countries or in various types of property.
Most property funds focus on commercial property, such as offices, warehouses and shops, but some also include an element of residential investment. They generally pay a regular income but it is usually possible to have this reinvested if you are aiming for long-term growth.
There are two main types of property fund:
- Traditional property funds invest directly in bricks and mortar. The fund takes responsibility for finding properties, handling the deals, seeking tenants and maintaining the buildings. Investors' returns represent any growth in the value of the properties owned by the fund, plus a share of the rents paid by tenants.
It is important to note that traditional property funds can be difficult to sell so you may not be able to cash in this investment when you want to. There may be a delay in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer's opinion rather than fact.
- Secondly, there are funds such as Fidelity's Global Property Fund which invest in the shares of companies in the property sector, such as developers, hotel chains, housebuilders and commercial landlords. Investors benefit if the shares go up in value. In addition, they may receive an income from dividends paid on the shares.
Real Estate Investment Trusts (REITs)
A global property fund can also hold shares in a type of company known as a REIT (Real Estate Investment Trust). REITs are listed on stockmarkets and their shares reflect the value of the properties they own.
In return for favourable tax treatment, they are required to pass on to investors a high proportion of their rental income (all of it in some markets).
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