Money: A framework for profit

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The Independent Online
PRIVATE investors tend to assume that investing in property is the preserve of property professionals. But economic and political change is coming, and ordinary investors can have a piece of the property action.

Property prices relate to interest rates and rental values as well as supply and demand, and investors are bullish thanks to British economic trends and European political developments. "We are excited about the potential for UK property-based unit trusts and investment trusts," says Jo Smith of independent financial advisers PEP. She points to fears that London stocks are overvalued and hopes that the single European currency will bring lower interest rates in the long term.

Nicholas Sutton, managing director of residential and commercial developers Crown Dilmun, says that "if interest rates fell from the current 7 to 5 per cent, property values could go up by 15 per cent". Competition, capital movement, transparency and cross-border investment are all expected to increase with the euro. Exchange-rate risks that exist now - and inhibit property investment - will vanish.

Unfortunately, investing in property for private investors is relatively difficult in the UK. Americans can use real estate investment trusts (Reits) which enjoy "enormous tax benefits", says Mr Sutton. "Here you have to buy shares in a quoted property company, which you can trade. You can choose a straightforward property investment company, a company with a development portfolio, or purely residential companies, either developer or investment orientated."

However, Mr Sutton says: "Even higher returns and more exciting investments are available in private companies run by developers or investors who want partners to reduce their risk exposure to a particular development. These opportunities come from smaller special-purpose companies, generally by word of mouth".

Investors with hundreds of thousands of pounds knock on the doors of big agents such as DTZ and Knight Frank. Investors with more modest amounts can get advice from smaller estate agents and other property or financial advisers.

Individuals whose investments begin and end with PEPs need not be excluded. Ms Smith says: "There are a lot of property funds on the market. Most are PEPable, and even if you have used your PEP allowances, they are available as straight unit trusts. There are also property-based pension funds." Private investors can go in whether they have a PEP allowance or not.

Investors may also require their adviser to take a global perspective. "You don't have to invest in your core market. Go international: buy into a fund to benefit from liquidity and low transaction costs," advises Joost Bomhoff of Rodamco, an international investment company based in Rotterdam.

However, experts at a recent seminar in Brussels warned that some national differences would remain after the euro is introduced: transfer taxes, methods of valuation and cultural and legal factors. Local knowledge will still be vital.

Property runes can be hard to read. Several speakers noted that Europe's ageing population will require more hospitals, but rewards in this field may not be automatic. "I would gladly invest in health care in the US but not in Europe," said Klaus Hohmann of Frankfurt investment company DEGI. "The politicians will foul it up. In the US, you can be relatively sure they won't interfere with market forces."

Mr Sutton says: "The UK government tried to encourage property investment via housing investment trusts. These proved unsuccessful initially in raising capital due to the high management costs of their operations and limited tax advantages. Should the tax structure improve, perhaps by making profits free of capital gains tax, housing investment trusts could mirror America's Reits."

But Mr Hohmann says a share in a property firm is not the same as a direct investment in property. "A Reit has a real-estate label but it is a stock. It is not really safe on its own."

Mr Sutton notes: "Ungeared property is very safe. Everybody reads of crashes when markets fall 20 per cent. If you have ungeared property and the value of the investment falls 20 per cent, that's a lot better than investing in shares. A trading company will probably have debt in its structure, and if that company goes bust, you lose everything." Ms Smith gives a similar warning, advising investors to put only a part of available funds in property.

q Contacts: PEP, 0171 377 5754; Crown Dilmun, 0171 495 8974; Royal Institution of Chartered Surveyors, 0171 222 7000; Rodamco (00-31-10) 224 2704; DEGI (00-49-69) 975 640.