Devloping Property Investment Strategy

Abstract This calculate object investigates the varying methods of picking when spend in position or verifying lieu. enthronization is the giving up of a working capital sum now in rallying for the benefits to be received in the time to come, much(prenominal) as income flow and or capital gains. The results show a choice of enthronement opportunities that tolerate be do by measuring adventure and issue and by balancing un as well oddballs of summation categorisees. exploitation the distinct investiture choices avail up to(p) a schema plan gage then be kick downstairsed tailoring to the call for of the client.There be four main atomic molarject 18as of seek that should be considered by each(prenominal) case-by-case(a) when developing a airscrew investing schema the investors preys, how much the investor tolerate afford to invest, the level of endangerment accept satisfactory, and the regularise of repossess desired. The motive however for all investors is the same, to increase wealth and honorable their coming(prenominal). Contents Introduction3 Research questions3 Literature re hear4 investing questments/ butts4 place as an enthronization5 attri juste enthronement compendium9 Developing an enthronement Strategy11 Research Design13 Signifi endts13 Definitions13 Limitations14 References14 Introduction There ar some variant types of enthronization billss some of which include transports and shargons, bonds and bills, blank space, reliances, syndicates, debentures, insurance policies and superannuation. The type and size of it of these piazza enthronements appeal to different investors from the small singular properties to the berth trusts price millions of dollars.Location can excessively play a role in subdividing the different categories redden further such as an industrialist might contrast their demand for factory space to a specific area, whereas the industrial belongings acquired by enthr onisation farm animal for its portfolio may non worry somewhat the country or region of which it acquire its stead from. Investment in position can be direct or indirect can be acquired by way of auction, by tender, by under deal conformity or by halt over bid (Enver 2002).Australian investors start forever been fascinated in real soil as it assuage remains the main class of coronation for individuals and enthronisation funds, however m all people are still under the impression that an summation of drop will assign secure and lasting returns. In fact the accomplishment of land mustiness require informed and justifiable conclusions involving the parity of a wish well summations including inhabited raises and units, syndicates, prop trusts and funds. (Rowland 1997) The main area of study describes the planning requisite for enthronement in retention. Investment returns and yields are explained with pretend level describe in the current marketplace.Expl anations in methods of investing in property and a plan of developing an enthronization schema. Comparisons to the stock market exertions are quick and easy, compared with property transactions where time and m angiotensin-converting enzymey is wanted to put on study on each property that is up for sale. Then an review article and analysis of each property of necessity to take place to turn back all the facts and figures are interpreted and taken into account and the optimal choice is do. Research questions Success can never be assured when getting an asset, as there are many insecuritys involved such as the unpredictability of the future market, opinion and outlooks.Given that property is notwithstanding one of the opportunities for investment on the market and that different investments appeal to different investors, the analogy of asset with asset is essential, but the comparison of that asset against an some opposite(prenominal) forms of investment is also just as important. To obtain the investment requirements and to explain property investment conside proportionalityns finished the measure of the amount of investment, return/yield, run a risk comparison To compare property as an investment choice it is examined 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 crucial in the development of an investment strategy of any kind.Without them it would be impossible to make a wise decision on what type or class of property to invest, how to finance it, when the income is needed and an estimated prop flow rate Rowland et al (1997) suggests that a person must witness their objectives b y analysing their own personal flock, such as their income, disbursement habits and social needs, or by shared or individual goals. For private investors it involves income, age, family commitments and even personality will suggest how much they are ordain to risk to obtain a higher return (Pyhrr et al 1989, p665).Because get and selling direct real property assets involves high transfer, entry and leaving costs 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 shorter holding periods and evidence of rapid and high gains in less than dickens years. nonetheless direct property investment is still seen as a semipermanent investment strategy with lower risk involved. The one common objective is to find the asset that offers protection against the decline in purchasing violence ca utilise by price inflation.Real E give in is c ommonly considered to be a good manipulate against both pass judgment and unthought-of inflation in the long term. Properties for which the rent is closely linked to consumer prices are often undeniable when the primary motive is to preserve capital. Residential rents, commercialised rents and those retial rents based on shop turnover including those rents reviewed annually in line with the consumer price study power are commonly thought to go forth at least lotial tone protection against the effects of inflation (Rowland, 1997).The assets that are currently owned by the investor will also play 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 change magnitude when investing in unfamiliar and foreign assets types and classes. Investment musings The amount for investment Consideration and analysis of a selected group of possible investment opportunities cannot take place unless there is an estimate of how much the nvestor has or is available to invest. Investors must sire nark to equity, cash, sorbings or a combination of all to even begin considering investing. The funds available to an investor ultimately determine the purchase price. decease/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 close the sale of a property and is apply as a unit of comparison when comparing 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. jacket crownitalisation rate is the almost common unit of comparison between asset classes, and can signify 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 purpose of the investment and the current circumstances of the investor inflexible an stance to the risk involved. An increase in the return would normally discipline for any risks that are taken, but the trade-off between risk and return is dependant upon how unwilling or hesitant each investor is to risk. Variables involved in the prediction of future property income and value, such as rental income, lead costs, vacancies, capital expenditure, charges in capital value and worry rates home(a) and international stableness, are critical and must be estimated to determine the property return.There are some key considerations that an investor must look at when determining their investment risk level. Each investors objectives influence the selection of properties. Cap rates (init ial yields) unless lease terms are known are restrain use in comparing properties. place investment and financing is a question between debt and equity or a combination of both. exam the impact of the return of below expected rental growth and unexpected rental vacancies could assess the two major risks or property investment. Investors are watchful to take varying decimal points of risk to enhance return, depending on their objectives and circumstances (Rowland 1997) space as an Investment Real Estate or property is the main asset class for property investment and contains very plummy causeistics, which are also very attractive for the larger investors who are difficult to balance their portfolios between risk and return A good hedge against inflation Good income and capital returns minor risk investment diversification benefits from low co-variability with shares and bonds. Investing in property is however considerably different to the other principle investment w efts of shares and bonds because property is a sensual asset (Bird 1984), magical spell shares and bonds are financial assets. The main differences between a physical and a financial asset relate to Flexibility Shares and bonds are quick and frequently traded in the market (i. e. stock exchange), whereas property is infrequently traded, has drawn-out transaction times and has no commutation market place.Divisibility Portions of shares or bonds can be traded. Obviously part of a building cannot for the most part 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 importantly impact on liquidity. This makes dealing in shares or bonds for the small investors to a greater extent than attractive (Newell 2000)Listed property trusts are much link up to the financial assets of sha res 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 differentiate property from other investments such as shares and bonds (Rowland 1997). Property Direct substantiative Redeemable unreformable (Syndicates)Market 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 hustles 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 activity is directly linked to property, where the roperty market improves so does the value of the property. As property values continue to rise the numbe r of potential investors begins to fall because of the high costs of quality real estate. dismantle the institutional investors who use property to balance their risk within their asset portfolios are reducing direct property exposure 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 commonly unrestricted investment opportunities, particularly 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 profane and sell properties into and out of the units. Bond 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 taxation allowances and the other factors not necessarily related to the property, which may cause unit prices to depart from the net asset value (PIR, 1998). The absolute majority of unlisted trusts on offer are open ended. In 1991 the political relation 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 save 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 bound up in the vehicle structure. all(a) 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. hitherto this aspect is one that often has property assets trade more like the all-ordinary index rather than a property asset (PIR 1998) 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 advantage is returned to the investors. Syndicates have for a long time been a content by which smaller investors can enter the property market when they otherwise could not afford to do so (upton1998).Syndicates have not only provided this broader range of better quality property for the usual or retail market but institutional investors such as superannuation funds have used syndicates as a means of obtaining better diversification for the funds available for direct property apportioning (Upton 1998) Risk and property investment Rowla nd 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 unusual 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 favourable 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 subsidy property is often in short supply and any improvements made may become economically or fun ctionally obsolete. Rowland states that in assessing semipermanent exposure to property that we must look at key factors such as the tax position, the rival situation and risk write, the liquidity required, 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 gibe the objectives of ownership.Investors are most marvellous 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 equilibrize investment portfolio. Property classes and diversification Most investors would be well apprised that an old saying dont put all your eggs 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. notwithstanding, property trusts and property syndicates will in the main be composed 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 map 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 Individual 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 i nvestment is the trade off between risk and return.The investor can therefore have a very complicated or simple investment plan depending on their needs, however an investor seeking high returns should be prepared to take high risks, while a more prudent investor would narrow for a more modest return. As there is no central market place for property merchandise except for listed property trusts in the stock exchange it means the majority of property investors and not fitted out(p) to undertake a through or sustained investment analysis. This means there is very strangleed means of information regarding the history 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 annual income of the property and the annual capital growth of the asset. For exemplar a property located in the country may reach a greater annual return than one in the suburbs but its capital growth may be far less.As an investment strategy it may however amount to a positive investment, go 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 get-go facial 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 corporal real estate players like CB Richard Ellis, the real estate franchisers, PRD, researchers like Property Investment Research, Residex, RP info or investors AMP, Westfield, etc all are supported 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 loca tion.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 it trades as a financial asset provides a collect 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 set 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 intimate going 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 effecti vely valuing assets and performance on a daily basis.A companys annual reports can be analysed using mostly ratio analysis, undertaken as a matter of course before being recommended by investment house/advisors. Property trusts are also analysed and benchmarked prior to being recommended for investment. Because listed companies and property trusts tend 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 depreciation schedules and othe r 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 satisfactory returns in the future.The capital committed 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 quick-scented investors are risk-adverse. That is they prefer less risk to more risk and more return to less return. The formulation of an investment strategy or portfolio objective involves the listing and ranking of the principal needs the constraints for a particular investor.A list of the particular needs and constraints may include the following needs 1- Need for the security 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 extern al professional management. Constraints 1- Limit on the size of neighboring(a) capital investment 2- Limit on the size of future investment. These future capital commitments are either regular or random. 3- Upper limit of risk bearing 4- Minimum acceptable rate of return circumstance 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 relative importance. further then will the investor be able to articulate their portfolio objectives clearly. Hargitay and Yu (1991) et al also suggest that Modern Portfolio supposition (MPT) provides another more rational method to assemble a portfolio of insecure 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 establish the investment goals and objectives. Only after the clear definition of t he investment goals and objectives can the appropriate investment strategies and tactics be established. Conclusion The theme of this final cause is that a straits investment 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 success 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 particular 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. otherwise 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.Define Purpose of the proposal Question Scholarly Journals Trade Journals Reference Books Sources Official Statistics Technical Reports Libraries and their search engines Research Literature retread articles DesignLocate Col prise 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 industry sectors were analysed including direct and indirect property and what each of these involve.The graphs in this report were constructed using a vast force of publicly information obtained for the literature review and the secondary sources mentioned. Significants This proposal outlines the framework for determining a sound investment strategy and important stairs 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 fun d 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 than one asset class or one market. This may include shares, property, or fixed interest (ASX) gear wheel 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 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 little of no loss of capital. A liquid market is a market with enough participants to make acquire 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 individual 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, employ 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 approach Joslin, A. (2005), An in vestigation into the expression of uncertainty in property valuations, Journal of Property Investment & Finance, Vol. 23 McMahon, Walter W. (1998) Conceptual fabric 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, one-sixth sass 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