Chapter 16: Property Markets

Question 1

Direct property investment:

SECURITY

Answer 1

The rental income depends on the quality of the tenant.
There is a risk of
- voids, 
- political interference, 
- and obsolescence.

Question 2

Direct property investment:

YIELD

Answer 2

Real investment, providing a hedge against unanticipated inflation.
The expected real return on property tends to be higher than on index-linked government bonds.
The running yield varies from property to property.

Question 3

Direct property investment:

SPREAD

Answer 3

• Capital values can be volatile in the long term
• stable in the short term due infrequent sales and valuations.
  However, The valuations are subjective and there is no central market in central quoted prices.
  The market is characterised by lack of information.

Question 4

Direct property investment:

TERM

Answer 4

Property tends to be a long-term investment.

Question 5

Direct property investment:

EXPENSES

Answer 5

Dealing costs are high.

Property management costs are high, although the tenant may be responsible for insuring and maintaining the property.

Question 6

Direct property investment:

MARKETABILITY

Answer 6

Direct property is very unmarketable and indivisible due to its large unit size.

Question 7

Direct property investment:

TAX

Answer 7

This will depend on the fiscal policy of the country concerned.

Question 8

What does it mean for a property to be prime?

Answer 8

A prime will score highly on the following factors:

• location
• age and condition
• quality of tenant
• comparables
• lease structure
• size

Question 9

What is meant by freehold?

Answer 9

Ownership of a property in perpetuity.
A freeholder has the right to occupy a building, let it out, and - subject to planning restrictions - to refurbish the property or develop it.
(may be restrictions on what can be done with the land such as covenants, easements, planning and building regulations and anti-nuisance laws).

Question 10

What is meant by leasehold?

Answer 10

A leasehold allows one of the parties (the leaseholder) use of a specified part of a building owned by another party, for a specified period, in return for some rent.

Question 11

What would you expect to see in a lease agreement?

Answer 11

• the names of the parties to the agreement
• commencement and termination dates
• clear description of the property
• the rent amount and payment frequency
• details of rent reviews
• permitted uses of the property
• who is responsible for repairs, insurance, and expenses
• break clauses

Question 12

Differences between a pooled property investment and shares in a property company

Answer 12

• the pooled property fund will normally have a constitution that specifies what it can invest in, with limits on liquidity and the level of management charges.
• the property company has no such restrictions and may also invest in more risky property developments.

Question 13

In comparing direct and indirect property, which factors would you discuss?

Answer 13

• choice and control
• diversification
• divisibility
• expenses
• expertise
• exposure to unusual or large properties
• forced selling
• marketability
• quoted prices
• tax
• volatility of prices and returns

Question 14

Factors to consider in addition to indirect property factors, for investment trust companies

Answer 14

• discount to Net Asset Value
• Possibility of gearing
  extra volatility that these introduce.