Investing in property can often require a significant amount of up-front capital on top of knowledge, a good element of skill, as well as a drop of good luck and good timing.
Before you start, it’s worth knowing there are different ways for prospective investors to get on to the property investment ladder – whether it be directly or indirectly. To help you understand what opportunity indirect property investment presents, read our guide below.
What Is Indirect Property Investment?
There are three key types of indirect property investments: land banking schemes, shares in property companies and real estate investment trusts (REITs).
Other ways to indirectly invest in property include property funds, property investment trusts, property unit trusts, OEICs, and property authorised investment funds.
In these instances, the investor generally hopes to benefit from their investment by receiving a financial return in the form of dividends or an increase in the value of their stock holding based on the market performance of those stocks and shares or bonds.
The Advantages Of Indirect Property Investment
Indirect property investment has several advantages over direct property investment.
One of these is the fact that you do not have to commit huge capital sums to the acquisition of a large or expensive property asset like you do with direct property investment.
In many ways, indirect investment is not as risky, even though you are still advised to exercise caution.
Other advantages include improved asset liquidity. For example, there is an active market for stocks and shares making it significantly easier to sell them quickly and cost-effectively.
Real property assets, on the other hand, can take time to sell, the transaction costs associated with the sale of property can also be significant.
Another benefit is that there are no day-to-day property management costs.
Real property can be a resource and time intensive asset to maintain and this can increase investment holding costs.
Shares, on the other hand, can be held with little day-to-day input required.
An example of an indirect investment would be to invest in a trust company or a UK Real Estate Investment Trust (REIT).
A REIT is a property investment company that owns and manages property on behalf of shareholders and is listed on a stock exchange and approved by HMRC.
It can invest in commercial property, residential property or both and has a special tax treatment to align them with the tax arrangements for direct investment in property.
You invest by buying shares in the REIT and it has two separate elements for tax purposes: a ring-fenced property letting business which is exempt from corporation tax; and non-ring-fenced activities like property management services which are not.
- The advantages of REIT
If the REIT you invest in does well, you will receive a distribution of the profits.
Because a REIT pays less corporation tax they might be able to return more profit to investors.
You can hold REIT shares in a tax-free ISA, up to your annual limit – see our guide on ISAs and other tax-efficient ways to save or invest.
- The disadvantages of REIT
A key disadvantage is that the value of your investment can decreases as well as increase and you may receive less than you invested.
It’s also worth knowing that REITs are not subject to direct supervision by the Financial Conduct Authority (FCA). Therefore if you invest in a REIT, you will not be able to go to the Financial Ombudsman Service to make a complaint or claim compensation from the Financial Services Compensation Scheme (FSCS) if the company goes bust.
Investing In Land Banking Schemes
Land banking works on a prospective basis: you buy a plot of land in an area that has not been given permission for development with the view that the value of the land will jump once planning permission is granted.
However, these schemes are high risk as the land could be protected and might never gain planning permission, so investors should be careful of scam.
Not surprising then that most land banking schemes are not authorised by the Financial Conduct Authority.
Before buying land, contact the area’s local council to find out if the land is likely to be released for development.
Visit the Financial Conduct Authority (FCA) website for a full warning on land banking investment schemes and use the register to see if a scheme is authorised as a collective or pooled investment.
- The advantages of land banking schemes
If the land banking scheme is genuine and the land grows in value, you might be able to sell the plot for more than you paid.
You can hold shares in a tax-free ISA, up to your annual limit.
- The disadvantages of land banking schemes
There is a clear high risk of fraud with this type of investment: be wary of buying land that can’t be developed, either because it’s protected due to industrial pollution or for its beauty or off-limits.
FCA unapproved land banking schemes are not subject to any rules or regulation on the fair handling of client’s money or treatment of customers.
If you invest through an unauthorised company and things go wrong, you can’t go to the Financial Ombudsman Service to make a complaint or claim compensation from the Financial Services Compensation Scheme (FSCS)
Stock-exchange listed property investment companies are companies that might own, develop and manage property on behalf of shareholders. These are generally too small for REIT status.
You invest by buying shares in the company and if the property company you invest in does well, you’ll earn a share of the profits.
You can also make money if the share price goes up, letting you sell for a higher price than you originally bought at.
- Advantages of buying shares in listed property companies
You can hold shares in a tax-free ISA, up to your annual limit.
Some companies invest in specialist property types, giving you access to markets that are normally hard to invest in.
- Disadvantages of buying shares in listed property companies
You may get less back than what you originally invested as the value of your investment can go down as well as up.
Listed property companies are not subject to direct supervision by the Financial Conduct Authority (FCA) so you can’t go to the Financial Ombudsman Service to make a complaint or claim compensation from the Financial Services Compensation Scheme (FSCS) if the company goes bust.
Balancing Your Property Investment Portfolio
Indirect investment in property assets is a great way to spread some of your risks and diversify your portfolio as opposed to sticking to one niche or property asset class.
By taking the indirect property investment route you may have more scope for success.
Guiding You Through Indirect Property Funds
As leading commercial property consultants, Prideview offers expert advice and support to clients across our specialist areas of expertise.
We can help you achieve your investment objective.
To discuss how we can help you, contact us here.