Property Investment and Valuation: Note 1(c)

Property Investment

Advantages of Investing in Property

• Investor has more control over the property purchased
• Fewer acquisitions need to be made where large sums are involved
• Property values are generally less volatile than stocks and shares of which prices change daily
• Companies are often highly geared making returns less secure than direct property investments
• When stock markets are depressed, it is still possible to sell property at reasonable price
• Tenants of property often pay their rent in advance, some quarterly, whereas dividend on equities in most cases are paid half-yearly in arrears
• Rent continues to be paid by tenants even if the company concerned is making a loss
• Rental income is a more secure form of investment since it is paid ahead of bank interest
• Even if a tenant enters into a liquidation the investor still retains the property asset. Following a liquidation, a company's equities will have minimal value, if at all
• Most of modern property leases have included within their lease agreements the provision for rent reviews, enabling the investor to charge current rates irrespective of tenant's profitability

Disadvantages of Investing in Property

• The time and cost involved in purchase or selling - the volatility in the prices of, for example, stocks and shares are partly offset by their rapid trading capability
• Property values do not always match rates of inflation
• Of critical importance with property is in deciding which is the best property to purchase
• Changes in technology, design or working and living practices will all affect property's value - in some cases where these factors have not been properly considered, they may have the effect of making the project obsolete before their decay
• Changes in communication networks will have a positive or negative effect
• Town planning decisions may also have a similar effect both upon the valuation  and the demand of a property

Factors to be Considered in Making Property Investment

• Investment objectives and horizon
• The security, regularity and growth of income
• The security and growth of capital
• The liquidity of capital - ease of conversion of investment to capital
• The cost of transfer and management
• Fund availability and the need for financing
• Hedge against inflation
• Risks and return involved
• Diversification opportunities 
• Taxation - income tax, real property gain tax, quit rent, assessment rate etc

Property Risks

1. Location: Location is the key factor determining the demand for property. Some locations remain popular with users but sometimes an area can lose its attractions e.g. when a shopping center affects the demand for shops in a high street. On the other hand, improvements such as a new transport facilities can improve the value of a location.
2. Building obsolescence: As building age, they wear out physically. Also new buildings tend to offer improved facilities for the users and attract tenants away from old buildings.
3. Supply: New supply affects the balance of supply and demand and therefore, rental value.
4. Tenant Default: Poor quality tenants may not pay the rent or look after the property, or may go bankrupt.
5. Vacancies: These arise due to the tenant's business failures or leases running out.