Property is hot again

Rachel Fixsen reports on how not to get your fingers burnt
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The Independent Online
Anyone with negative equity will guffaw at the term "property as an investment". For real belly laughs it is second only to the old chestnut "safe as houses". But things look very different in the property market these days. Residential property prices are forecast to leap by up to 12 per cent this year after an 8.8 per cent rise last year. Commercial property has also picked up.

Should you take a fresh look at the property market as a way of boosting your savings, or does it still have too many drawbacks?

Buying units in a property unit trust lets you reap any benefits of a rising market, but dodge many of the pitfalls of direct investment in bricks and mortar.

"Anyone can buy a small shop and let it out, but it is paved with stupendous difficulties for the small investor and carries a very high risk," says Peter Smith, regional director of independent financial advisers Hill Martin.

Trying to let and manage a property on your own could prove a nightmare. Another serious problem with buying a building as an investment is that it is illiquid - which means it is hard to turn it back into cash quickly if you need to. There may be no immediate buyer for that particular property.

Valuation is a further obstacle for property as an investment. Valuing the share of a listed company is easy, because you can compare it to the thousands of identical sales made each day. But property valuations can turn out to be hopelessly wrong. They are no more than somebody's opinion of what a building might fetch.

With a property unit trust, on the other hand, you can sell your units for cash at any time. And they are simply worth a proportion of valuations of the trust's underlying properties. Unless the trust ran into serious difficulties, it would not actually have to sell its assets to give you your money back.

Barclays Unicorn and Norwich Union Trust Managers both run authorised property unit trusts.

The Barclays Unicorn trust holds 80 per cent of its assets in property, mostly offices and shops with some retail warehousing and industrial buildings. The other 20 per cent is held in property shares and other liquid assets.

John Kelly, investment director of the Barclays Unicorn trust, admits the UK property market still has its black spots. "There are still some valuations that are 20 per cent less than at the height of the Eighties," he says.

But all buildings are not the same. "As long as you have a reasonable location and a flexible building structure, you're seeing relatively good growth."A flexible office building structure could be easily adapted to accommodate a certain type of technology, for example.

Mr Kelly says Unicorn property trust should yield between 10 and 12 per cent this year, with between 6 and 8 per cent coming from rental income, and the rest from capital growth. You can invest upwards of pounds 1,000 in the Barclays Unicorn property trust.

Norwich Union's unit trust, which has a slightly higher proportion of liquid assets, has the same minimum investment.

A new breed of quoted property unit trust is due to launched this summer. Hopes are high that this new investment vehicle could breathe new life into the commercial property market, by increasing liquidity. You could also invest in property indirectly by buying shares in companies which manage property. Share prices in this sector have shot up in the last few months.

Ray Jones, property analyst at stockbroker UBS, says shares in property firms outperformed the broader stock market by 10 per cent in 1996, on the back of stabilisation of the direct property market at the end of 1995.

Property shares produced an average return including dividends of more than 28 per cent in the last year, according to Salomon Brothers' UK property securities index. Capital Shopping Centres would have given a massive 75 per cent return.

Mr Jones sees a steady trend towards growth for property shares in general. But there are areas where shares will do better than this. Companies owning central London offices, particularly in the West End, and firms with large regional shopping centres are poised for above average returns, he says.

British Land, Capital Shopping Centres, Chelsfield and Pillar Property Investments are four which still look good value, according to Mr Jones.

Property is often seen as an "anti-cyclical" investment, meaning it goes against the grain of the prevailing economical trend. So if you're betting on a bad year for stocks, particularly given the looming general election, property could be a good safe haven for your money.

But investing in property is largely for the well-heeled. Equities offer a much more suitable deal for those with an investment portfolio of less than pounds 100,000, advisers say. "It's just less flexible," says Roger Harris of independent financial advisers Roger Harris & Co. "Property unit trust units can be sold fairly easily, but there's always the possibility of delaying any sale." He adds that a delay could be up to six months.

Charges levied on property unit trusts can sometimes be quite high, Mr Harris says. This is largely due to the cost of managing properties.

And some are dubious that the property market recovery is as solid as is often proclaimed.

"I think it is a chastening walk through the City of London ... I'm staggered at the number of completely obsolete properties which are dark and shuttered," warns Mr Smith.