Devloping Property Investment Strategy

Abstract This research proposal investigates the varying methods of choice when investing in rule or in immediately dimension. Investment is the giving up of a roofital sum now in commute for the benefits to be received in the future, such as income f first gear and or dandy gains. The results show a choice of investing opport wholeies that groundwork be made by measuring risk and issuing and by balancing dissimilar types of plus classes. Using the variant coronation choices on hand(predicate) a schema intention tolerate then be developed tailoring to the needs of the client.There atomic number 18 four principal(prenominal) beas of research that should be considered by each angiotensin-converting enzyme-on-one when growth a airplane propeller enthronement strategy the investors objectives, how much the investor can afford to invest, the level of risk acceptable, and the rate of bribe desired. The motive save for in all investors is the same, to increase wea lth and secure their future. Contents Introduction3 enquiry questions3 Literature review4 Investment requirements/objectives4 Property as an Investment5Property enthronization outline9 Developing an Investment Strategy11 Research Design13 Significants13 Definitions13 Limitations14 References14 Introduction There are galore(postnominal) different types of investings some of which include extractions and shares, bonds and bills, quality, trustfulnesss, fellowships, debentures, insurance policies and superannuation. The type and size of these attribute investments appeal to different investors from the olive-sized respective(prenominal) properties to the airscrew trusts worth millions of dollars.Location can besides bout a role in subdividing the different categories even further such as an industrialist might limit their demand for factory space to a specific area, whereas the industrial property acquired by investment blood line for its portfolio whitethorn non worr y or so the country or region of which it purchase its property from. Investment in property can be cypher or indirect can be acquired by way of auction, by tender, by mystical treaty or by school over bid (Enver 2002).Australian investors bem economic consumption forever been involution in real e give in as it still re master(prenominal)s the main class of investment for individuals and investment funds, however many people are still under the impression that an summation of land impart rancider secure and lasting returns. In fact the acquisition of land mustiness require certain and justifiable decisions involving the comparison of a interchangeable assets including tenanted houses and units, syndicates, property trusts and funds. (Rowland 1997) The main area of study describes the planning needed for investment in property. Investment returns and yields are excuseed with risk level outlined in the current market.Explanations in methods of investing in property and a plan of developing an investment strategy. Comparisons to the stock market minutes are quick and easy, compared with property transactions where time and money is needed to collect knowledge on each property that is up for sale. Then an inspection and analysis of each property needs to fulfill place to ensure all the facts and figures are interpreted and packn into account and the optimal choice is made. Research questions Success can never be assured when acquiring an asset, as there are many risks involved such as the unpredictability of the future market, opinion and lookout mans.Given that property is whole one of the opportunities for investment on the market and that different investments appeal to different investors, the comparison of asset with asset is essential, alone the comparison of that asset against other forms of investment is overly just as grievous. To obtain the investment requirements and to explain property investment considerations through the meas ure of the amount of investment, return/yield, risk comparison To compare property as an investment choice it is analysed through risk, property classes and diversification. To analyse the property investments which are explained for the planning of investment strategy To develop the needs and constraints of an investment strategy Literature review Investment requirements/objectives Investment objectives must reflect the needs of the investor indirectly suggest the appropriate type and duration of property investments and are critical in the development of an investment strategy of any kind.Without them it would be im accomplishable to make a discerning decision on what type or class of property to invest, how to finance it, when the income is needed and an estimated keeping stay Rowland et al (1997) suggests that a person must determine their objectives by analysing their own personal spate, such as their income, spending habits and social needs, or by shared or individual goals. For private investors it involves income, age, family commitments and even reputation go out suggest how much they are willing to risk to obtain a higher return (Pyhrr et al 1989, p665).Because buying and selling direct real property assets involves high transfer, entry and exit cost and long selling periods it is consequently seen as an illiquid investment. Whereas an investment in property funds or units or shares also known as indirect property allow quick an easy trades along with slighter holding periods and evidence of rapid and high gains in less than two years. However direct property investment is still seen as a long-run investment strategy with lower risk involved. The one everyday objective is to find the asset that offers protection against the decline in purchasing power ca employ by legal injury inflation. authoritative Estate is commonly considered to be a good circumvent against both expected and unthought-of inflation in the long term. Properties for which the rent is closely linked to consumer prices are a lot required when the base motive is to preserve detonating device. Residential rents, commercial rents and those retial rents based on shop turnover including those rents reviewed one-yearly in line with the consumer price index are commonly thought to issue at least uncomplete protection against the effects of inflation (Rowland, 1997).The assets that are currently owned by the investor will also tactical maneuver a role in the determinants of the investment objectives and process. A diversified portfolio is commonly desired by investors and often requires different expertise to assist in the acquisitions, which lowers risk that can be increased when investing in unfamiliar and foreign assets types and classes. Investment considerations The amount for investment Consideration and analysis of a ingested group of possible investment opportunities cannot take place unless there is an estimate of how much the nvestor h as or is available to invest. Investors must have access to virtue, cash, borrowings or a confederacy of all to even begin considering investing. The funds available to an investor at last determine the purchase price. Return/yield The expected rate of return must match the investors objectives to determine the property class or type suitable. The measurement of return is calculated from known facts around the sale of a property and is used as a unit of comparison when analyze direct and indirect property.A suitable cash flow for the investment and the perceived risk should be viewed in conjunction with the rate of return, with a higher risk property requiring a higher rate of return. capitalisation rate is the most common unit of comparison between asset classes, and can indicate whether a property is overpriced or incorrectly valued in some way with market evidence. The cap rate can be calculated by dividing the net income by the price expressed as a decimal or initial yield on purchase. Investment riskRowland et al suggests that the shoot for of the investment and the current circumstances of the investor determined an attitude to the risk involved. An increase in the return would unremarkably compensate for any risks that are taken, but the trade-off between risk and return is dependant upon how unwilled or hesitant each investor is to risk. Variables involved in the prediction of future property income and value, such as rental income, running costs, vacancies, capital expenditure, charges in capital value and interest rates national and supranational stability, are critical and must be estimated to determine the property return.There are some secern considerations that an investor must look at when determining their investment risk level. Each investors objectives influence the selection of properties. majuscule rates (initial yields) unless lease terms are known are limited use in comparing properties. Property investment and financing is a question between debt and equity or a combination of both. Testing the impact of the return of below expected rental growth and unexpected rental vacancies could appraise the two major risks or property investment. Investors are prepared to take varying degrees of risk to levy return, depending on their objectives and circumstances (Rowland 1997) Property as an Investment Real Estate or property is the main asset class for property investment and contains very desirable characteristics, which are also very entrancing for the larger investors who are trying to equipoise their portfolios between risk and return A good hedge against inflation Good income and capital returns emit risk investment Diversification benefits from low co-variability with shares and bonds. Investing in property is however considerably different to the other principle investment options of shares and bonds because property is a sensual asset (Bird 1984), while shares and bonds are pecuniary assets. The main differences between a physical and a monetary asset relate to Flexibility Shares and bonds are readily and frequently traded in the market (i. e. stock exchange), whereas property is infrequently traded, has lengthy transaction times and has no central market place.Divisibility Portions of shares or bonds can be traded. Obviously part of a building cannot generally be traded, although subdivision by strata titling can be an option. Liquidity Shares and bonds can be viewed as short-term investments, where as property is seen as a medium-to-long term investment. The high costs associated with entry and exit to property significantly impact on liquidity. This makes traffic in shares or bonds for the small investors more than attractive (Newell 2000)Listed property trusts are more related to the financial assets of shares and bonds rather than the physical asset of composite property (Joslin 2005). Property as an investment choice Real estate is often acquired over other investment assets for its low risk movement, however this ignores many characteristics that mark off property from other investments such as shares and bonds (Rowland 1997). Property Direct Indirect Redeemable Unredeemable (Syndicates)mart Priced Appraisal Priced (Listed) (Unlisted) Direct property is the purest form of property investment (PIR 1998), but mostly known as where the owners name appears directly on the title papers. It ranges from the simplicity of a residential investment by a private individual, which is easily understood, to that of the sophisticated commercial property portfolios managed by institutions (Upton 1998). The level of economic exercise is directly linked to property, where the roperty market improves so does the value of the property. As property values continue to revolt the number of potential investors begins to fall because of the high costs of quality real estate. Even the institutional investors who use property to balance their risk within their asset portfolios are reducing direct property ikon to between only 10-15% of the value of the portfolio (PIR 1998). Indirect property investments are often defined as pooled investments and are covered by the Managed Investment Act 1998.This notion allows for the purchase of types and classes of properties that would not otherwise be available to the average investor. Listed trusts are usually unrestricted investment opportunities, crabbedly the large and more liquid trusts. The Australian Stock exchange is used by the investors to trade their units and the trusts managers use it to buy and sell properties into and out of the units. sequester price and the comparative risk for each individual property trust are what drives the prices of units on the stock exchange.This itself is governed by the property, the lease, the tenant, the manager, liquidity and tax allowances and the other factors not necessarily related to the property, which may cause unit prices to depart from t he net asset value (PIR, 1998). The majority of unlisted trusts on offer are surface ended. In 1991 the Government introduced changes governing unlisted trusts which has the effect of turning most into what is termed hybrid funds, wherein they offer a mix of direct property, property securities, and also cash reserves.This liquidity is necessary to pay out redemptions which are the units that can be redeemed against the trust after a year they are not traded on the stock exchange as are listed trusts. Trusts were able to overcome two of the main problems of direct property ownership Firstly costs transaction costs are much lower and are shrink up in the vehicle structure. All the unit-holders share these indirectly. Secondly liquidity, investors are able to trade their unit holdings for cash, which is beneficial to both small and large investors.However this aspect is one that often has property assets avocation more bid the all-ordinary index rather than a property asset (PIR 1 998) A property syndicate is an investment vehicle through which investors can have direct ownership of one or more properties legally (Upton 1998). The investment usually lasts between 5-12 years after which the investment properties are sold and the proceeds is returned to the investors. Syndicates have for a long time been a means by which smaller investors can picture the property market when they otherwise could not afford to do so (upton1998).Syndicates have not only provided this broader range of punter quality property for the general or retail market but institutional investors such as superannuation funds have used syndicates as a means of obtaining ruin diversification for the funds available for direct property al repair (Upton 1998) Risk and property investment Rowland et al (1997) suggests that there are a number of important or special investment considerations, which are strategically important to investors developing an interest in property. The most significant factors are Specific risk, each individual property is unique and will require a detailed appraisal of specific opportunity. -Costs of management and charges are upwards of 25% of gross income while specialised management is also required due to affirmatory tenant rights, compared to investment in other equities or bonds. These costs are high. -Market information is not as readily available, less reliable and is much more expensive than other index market information. -Financial considerations. A considerable degree of financial leverage is normally required, which comes under increasing pressure in economic and property cycles.This is why decisions made should be long term. -Quality premium property is often in short supply and any improvements made may become economically or functionally obsolete. Rowland states that in assessing long-term mental picture to property that we must look at key factors such as the tax position, the pair situation and risk profile, the liquidity req uired, the character of the liabilities Rowland (1997) writes. The return from any property cannot be judged properly without also assessing the risk that the investment may not meet the objectives of ownership.Investors are most unlikely to take on additional risks unless there is sufficient increase in the expected return. This point is the basis of all investment not only for property. The investor makes the choice between high risk and high return, or low risk and low return. These are again the principles of a balanced investment portfolio. Property classes and diversification closely investors would be well aware that an old saying dont put all your bollock in the one basket which is a practical investment strategy. All of the sensible institutional investors balance their asset portfoliosAs stated earlier, McMahon (1998), property only plays a small part of between 10 to 15% of total asset portfolio composition, which normally consists of property, shares and bonds. However , property trusts and property syndicates will principally be tranquil entirely of property, but contain many sub classes or property types which in turn play an important part in the diversification strategy. It must be remembered, property can be direct and indirect, interstate, intrastate or international. Property investment analysis This chart shows the relationship between each asset class and the level of risk and return that can be expected.High Potential Return Low Expected Risk High Cash Fixed interest Property Growth Alternative investments Assets Shares individualistic investors each have different and unique circumstances that need to be taken into considerations when making a decision between direct and indirect property investment. It is often argued, property investment is the trade off between risk and return.The investor can consequently have a very complicated or simple investment plan depending on their needs, however an investor seeking high returns should b e prepared to take high risks, while a more prudent investor would settle for a more modest return. As there is no central market place for property profession except for listed property trusts in the stock exchange it means the majority of property investors and not equipped to undertake a through or sustained investment analysis. This means there is very limited means of information regarding the explanation of trading including returns for the unlisted trusts.The individual investors objectives or requirements will often determine the class of property for investment, which is frequently balanced by their experience or existing property portfolio impacting on the risk return strategies. Direct property Most direct property analysis is based on a direct comparison basis. Investors choosing income-producing properties balance the overall return/yield on the net yearly income of the property and the annual capital growth of the asset. For example a property located in the country may sustain a greater annual return than one in the suburbs but its capital growth may be far-off less.As an investment strategy it may however amount to a substantiating investment, returning more than it costs to own. Direct comparison analysis requires a comparison of like with like therefore a property on a busy main road location is not comparable to a property with direct water frontage. Therefore the influences of Type, location and timing need to be considered with return or yield. Property information. Property information can be broken down in to three main categories, general overview, specific class/type and local information.General overview when an investor is first expression to invest in property they want a general overview about the whole industry, what is hot and whats not and where to find it. This information can be found on sites like ABS, The Property Council of Australia, The Australian Property Institute, Access Economics, The Real Estate Institute etc. These sites will provide overall information on trends, the present state of the market and future predicted trends, which will assist the investor in choosing a location and class of property for investment.Specific class/type large corporate real estate players like CB Richard Ellis, the real estate franchisers, PRD, researchers like Property Investment Research, Residex, RP data or investors AMP, Westfield, etc all are support by extensive research departments and are able to provide very specific property performance information. The difficulty in using their services is that most are commercial businesses and seek payments for the services provided. local Information once the location and the class of property is chosen then there is no better research than getting to that location.When you have acquired/ researched, the latest most comprehensive information, then the analysis process is undertaken, as we have demonstrated earlier. Indirect property Indirect property because i t trades as a financial asset provides a clear trial of transactional and corporate informational because of the rules associated to being listed on the stock exchange. The stock exchange also has some very strict code of conduct rules for companies or individuals as traders on the stock exchange, far more stringent than for regulated property traders/professionals.Each individual company or property trust listed on the stock exchange must meet reporting requirements, which allows advisers access to the most national deprivation concern and stock market trading information. It is for this reason that the stock market investing is volatile, analysts have intimate corporate information, coupled with cyclical and world events puts daily pressure on stock values. Stocks are trading daily effectively valuing assets and performance on a daily basis.A companys annual reports can be analysed using mostly ratio analysis, undertaken as a case of course before being recommended by investmen t house/advisors. Property trusts are also analysed and benchmarked forward to being recommended for investment. Because listed companies and property trusts operate in the economy, they are obviously affected by the overall state of the local and world economies. If both the local and world economies are doing well, then, other things being equal, you could expect listed companies and trusts to do well and stock prices increases.Developing an Investment Strategy The development of an investment strategy over a period of time allows the individual to assess what they can afford, their risk level and provides a clear outlook for the future. The main considerations would be how much you need to borrow and the level of gearing, the purchasing costs, ongoing costs and derogation schedules and other tax issues. Hargitay and Yu (1991) et al suggests that the investment usually means the acquisition of assets by the investor with the view to okay returns in the future.The capital commit ted to the acquisition of the assets and the expected returns are exposed to risk. Generally the greater the exposure to risk, the higher the return expected by the investor as a reward for bearing the risks involved. Most keen investors are risk- indecorous. That is they prefer less risk to more risk and more return to less return. The grammatical construction of an investment strategy or portfolio objective involves the listing and ranking of the principal needs the constraints for a item investor.A list of the particular needs and constraints may include the following take ups 1- Need for the protective covering or capital invested. 2- Need for the security and stability of income. 3- Need for the readily marketable investment, i. e. liquidity 4- Need for tax exemptions or reliefs 5- Need for external professional management. Constraints 1- Limit on the size of immediate capital investment 2- Limit on the size of future investment. These future capital commitments are either systematic or random. 3- Upper limit of risk bearing 4- Minimum acceptable rate of return precondition of investment 6- Statutory controls It is extremely important that the investor sees their particular position amongst the needs and constraints and is able to express their relation back importance. Only then will the investor be able to articulate their portfolio objectives clearly. Hargitay and Yu (1991) et al also suggest that redbrick Portfolio Theory (MPT) provides another more rational method to assemble a portfolio of risky securities. MPT provides the rational to select a combination of risk free assets that would meet the investors objectives.The first and fundamental problem facing the investor is to grant the investment goals and objectives. Only after the clear definition of the investment goals and objectives can the appropriate investment strategies and simulated military operation be established. Conclusion The theme of this proposal is that a sound investme nt decision-making is based on a thorough return and risk analysis, which is the best strategy for maximising a persons wealth. The institutional or corporate investor usually invests to make adequate provisions to cover future liabilities and hedge against the mastery or failure of their enterprise.Various institutional investors have distinctly different liabilities and tax status and therefore require different investment and portfolio structures to meet their respective commitments now and in the future. The first step in the establishment of investment objectives is the determination of the investors needs. The needs of an individual investor will be different from those of an institutional or corporate investor. However the primary motive for investment in all cases is profit. Usually individual investors provide for certain goals, retirement, educating their hildren, or simply hoping to increase their wealth through investment of individuals to money matters, and in particul ar to risks, varies greatly. Some have the attitude that given their investment amount is only small that when investing in risky ventures the risk aspect is insignificant, so they accept the risks quite readily. Other investors would regard the loss of their small investment as a major disaster. Research Design The development of a property investment strategy data collected mainly from secondary sources. plant Purpose of the proposal Question studious Journals Trade Journals Reference Books Sources Official Statistics Technical Reports Libraries and their search engines Research Literature Review articles Design locate Col Evaluate Verify Construct and Incorporate data into the proposal The purpose of this proposal is to examine the way in which an individual decides what is the best investment option to undertake. Included is the discussion of issues on investment strategies risk and return measures limitations investment decisions investment objectives. A variety of industr y sectors were analysed including direct and indirect property and what each of these involve.The graphs in this report were constructed using a vast array of publicly information obtained for the publications review and the secondary sources mentioned. Significants This proposal outlines the framework for determining a sound investment strategy and important steps and criteria a potential investor must undertake in order in maximise their financial wealth. Positive investment results are directly related to a well researched and thought about investment strategy. DefinitionsAsset allocation The proportion of your total capital you invest in the different asset classes. This will be largely determined by your risk profile (ASX) Benchmark The yardstick that a fund manager compares the performance of their fund to, such as the All Ordinaries Index which may be used as a benchmark for Australian Shares (ASX) Diversified Portfolio A portfolio that holds a variety of assets over more th an one asset class or one market. This may include shares, property, or fixed interest (ASX)Gearing Refers to the process of the increasing funds available for investment through borrowing. The ratio of debt finance to equity finance or as The use of long-term debt in financing an entity. Gearing may be measured as EBIT/EBIIT interest, Used to be known as Leverage (ASX) Hedge A transaction, which reduces or offsets the risk of a current holding. (ASX) Liquidity Being able to convert assets into cash easily, quickly and with petty(a) of no loss of capital. A liquid market is a market with enough participants to make buying and selling easy. ASX) Return on investment What you earn from your investments, including dividends, interest or other income and realised capital gains. Return is usually expressed as a percentage of the amount invested. (ASX) Limitations This research proposal of developing a property investment is limited in that it does not take into consideration indivi dual circumstances and further analysis of this should be done before investment begins. This proposal also does not take into the account other factors that affect the market, which can also then affect an investment.This proposal also ignores the adverse tax consequences associated in investment, which are critical in any investment strategy. References Australian Securities Exchange, 2008, (ASX) Bird, P. (1984), Commodities as a hedge against inflation, Applied Economics, Byrne P and Lee S, 2004, Different Risk Measures Different portfolio compositions, Journal of property investment and finance. Enever, N. , Isaac, D. (2002), The Valuation of Property Investments, 6th ed. , Estates Gazette, London, Hargitay.S. E and Yu. S, 1991, Property Investment Decisions a quantitative burn up Joslin, A. (2005), An investigation into the expression of uncertainty in property valuations, Journal of Property Investment & Finance, Vol. 23 McMahon, Walter W. (1998) conceptual Framework for the Analysis of the Social Benefits of Lifelong Learning, Education Economics, Newell G, Kottegoda P and Acheampong P, 2000, Using style analysis to assess direct property performance, Sixth Rim Real Estate Society, SydneyNewell G, Acheampong P, Kishore and Padan M 2000, Diversification issues in property securities funds, Sixth Pacific Rim Real Estate Society, Sydney Property Investment Research, PIR 1998, Melbourne Pyhrr. S. A and Cooper. R. J 1989, Real Estate Investment Strategy, Analysis, Decisions, New York Wiley Rowland. P. J 1997, Property Investments & their financing, 2nd edition, LBC (Thomson) Upton D, 1998 flirting with debt, Property Australia Define Question Secondary sources Collect, Review & analyse data Research report