Get­ting to grips with prop­erty

A real-es­tate in­vest­ment trust could be a good way to in­clude prop­erty in a well-di­ver­si­fied port­fo­lio, says Brewin Dol­phin

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PROP­ERTY has been a favourite in­vest­ment for the past 20 years, even if it isn’t al­ways the eas­i­est to ac­cess. Stamp duty in Jersey and Ire­land is con­sid­er­ably lower than in the UK, where the Gov­ern­ment in­tro­duced a puni­tive tax regime for buy-to-let in­vestors and buy­ers

of sec­ond prop­er­ties—the net re­sult is that many pre­vi­ously prof­itable prop­er­ties are now los­ing money. The in­crease in up-front costs, to­gether with a cut in tax breaks, has pushed prop­erty out of reach for some, leav­ing them un­able to cap­i­talise on what many view as one of the safest in­vest­ments you can make.

How­ever, not only is buy-to-let now a much less at­trac­tive propo­si­tion over­all, di­rect own­er­ship of an in­di­vid­ual prop­erty is of­ten more trou­ble than peo­ple en­vis­age, with agent’s fees, main­te­nance costs, ac­coun­tant’s fees and other out­go­ings all slash­ing re­turns. If man­ag­ing the prop­erty your­self, fre­quent trips to fix bro­ken ap­pli­ances or deal­ing with dif­fi­cult ten­ants can make own­ing a prop­erty a real headache.

Ad­di­tion­ally, prop­erty is not quite the ‘safe’ in­vest­ment that many peo­ple think it is. In Jersey, prop­erty prices rose steadily un­til 2008, but have sub­se­quently re­mained rel­a­tively sta­ble. UK prop­erty prices have ac­tu­ally been quite volatile over the past decade and many ar­eas have missed out on the me­te­oric price rises seen in greater Lon­don. In Ire­land, the burst­ing of the prop­erty bub­ble 10 years ago is an oft-re­peated cau­tion­ary tale about the dan­gers of fol­low­ing the crowd.

If we change our fo­cus to com­mer­cial prop­erty, this has also had good years and bad over the past decade, some­times out­per­form­ing other in­vest­ments and some­times un­der­per­form­ing. Cer­tain shocks to the sys­tem, such as the credit crunch in 2008 and the re­sult of the Brexit ref­er­en­dum last year,

‘The burst­ing of the prop­erty bub­ble in Ire­land is a cau­tion­ary tale’

took a par­tic­u­larly hard toll on com­mer­cial prop­erty val­ues as prices are in­trin­si­cally linked to growth within an econ­omy and take into con­sid­er­a­tion fu­ture de­mand dy­nam­ics. In­deed, other in­vest­ments have out­per­formed prop­erty, beg­ging the ques­tion whether it should rank so highly in terms of de­sired in­vest­ments. Over the past five years, for ex­am­ple, UK house prices have risen 37% on av­er­age, out­per­form­ing one of the two main UK share in­dices, whilst sig­nif­i­cantly un­der­per­form­ing the other. The FTSE 100 and FTSE 250 have seen in­creases in value of 27% and 71%, re­spec­tively.

That said, prop­erty re­mains an at­trac­tive propo­si­tion over the long term. A chronic short­age of hous­ing mean that fun­da­men­tals are there to un­der­pin as­set val­ues and rents should con­tinue to rise over time.

Given that, where should prop­erty fit within your port­fo­lio? Like any as­set, it should form part of the over­all pic­ture of your wealth and needs to be con­sid­ered when talk­ing about fam­ily fi­nan­cial plan­ning as it may be sub­ject to in­her­i­tance taxes in the UK and Ire­land (but not in Jersey). Also, un­like other as­sets, it can’t be di­vided up be­tween chil­dren.

Hav­ing an in­vest­ment prop­erty—or a few of them—is def­i­nitely not a bad thing, but what in­vestors need to bear in mind is that prop­erty isn’t like stocks and bonds. If you want to help your son or daugh­ter get onto the prop­erty ladder them­selves or wish to help fund your grand­child’s univer­sity ed­u­ca­tion, you can’t simply sell an ex­tra bed­room or that con­ser­va­tory you never use in or­der to make it hap­pen. You could, how­ever, sell some shares that have per­formed well over the past few years.

If all of this makes sense, but you still don’t want to miss out on ris­ing prop­erty prices in Jersey or else­where, in­vest­ment funds such as real-es­tate in­vest­ment trusts (or REITS) are a great al­ter­na­tive. REITS and other prop­erty funds can in­vest in both res­i­den­tial and com­mer­cial prop­erty, but have the added ad­van­tage of be­ing traded on the open market just like stocks and bonds. You can buy into or sell out of them at any time, mean­ing you can lend a help­ing hand for down pay­ments or school fees at your dis­cre­tion.

As re­gards res­i­den­tial prop­erty in­vest­ment, even­tu­ally, most pur­chases will prob­a­bly rise in value. How­ever, rather than view­ing houses first and fore­most as in­vest­ments, per­haps it’s sen­si­ble to re­mind our­selves from time to time to look at our homes for what they are: build­ings the pri­mary role of which is to pro­tect us from the el­e­ments, keep us warm, make us feel safe and bring us plea­sure. They’re a place to en­joy life and make memories with fam­ily and friends, in Jersey and else­where. The value of in­vest­ments and any in­come from them can fall and you may get back less than you in­vested. Past per­for­mance is not a guide to fu­ture per­for­mance. Per­for­mance is shown be­fore charges which will have the ef­fect of re­duc­ing the il­lus­trated per­for­mance. This in­for­ma­tion is for il­lus­tra­tive pur­poses only and is not in­tended as in­vest­ment ad­vice. Please note that this doc­u­ment was pre­pared as a gen­eral guide only and does not con­sti­tute tax or le­gal ad­vice. While we be­lieve it to be cor­rect at the time of writ­ing, Brewin Dol­phin is not a tax ad­viser and tax law is sub­ject to fre­quent change. Tax treat­ment de­pends on cur­rent leg­is­la­tion and your in­di­vid­ual cir­cum­stances; there­fore you should not rely on this in­for­ma­tion with­out seek­ing pro­fes­sional ad­vice from a qual­i­fied tax ad­viser. The opin­ions ex­pressed in this ar­ti­cle are those of Mark Miles, not nec­es­sar­ily those of Brewin Dol­phin Ltd.

Back to the is­land: prop­erty prices in Jersey rose steadily un­til the credit crunch in 2008 and have re­mained rel­a­tively sta­ble since then

Mark Miles, Head of Of­fice at Brewin Dol­phin Jersey

Source: Hal­i­fax

UK house price changes, year-on-year

Many peo­ple like the idea of in­vest­ing in prop­erty, but a real-es­tate in­vest­ment trust could be an at­trac­tive al­ter­na­tive— with­out the ties of man­ag­ing an­other house

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