Buying real estate is one of the most popular forms of investment around the world with more than half of all adults in Western countries owning a home and an estimated one in 10 Brits alone owning a second one.

Jas Sanger, a British financial director at recruitment firm Mackenzie Jones Middle East, has £14 million (Dh66.8m) of real estate assets in the UK spread across buy-to-let terraced houses in London and new build developments.

“Don’t wait to buy property, buy property and wait!” he says, confidently.

Most investors expect land prices – and consequently house prices too – to increase every year, based on Mark Twain's oft repeated quote about it being in limited supply, while the population continues to rise. This has certainly been the long term trend on average in most Western countries, barring a few years of economic turmoil.

Unlike stocks and shares or bonds, real estate is something which is ‘real’ and has its own, intrinsic use. If an investor owns a house as an investment and prices fall significantly or they can't find a tenant, they can still use the house to live in.

However, there are also significant risks associated with buying property as an investment.

Firstly, real estate's quality as a real asset means that it is subject to damage and destruction. A house or an office could burn down or be damaged by a flood requiring expensive repairs in a way that a stock or a bond never could. This also requires hands-on management if a tenant's boiler or air conditioning breaks, which can be expensive and will eat into returns.

Secondly, property can be difficult to trade it in a hurry, leaving an investor stuck with an illiquid asset if they can’t find a buyer.

Thirdly, with the majority of adults in Western countries already owning a home to live in, buying another property leaves investors overly exposed to one particular asset type.

And, as any financial advisor will say, track record is no guarantee of future performance. Just because average house prices and land prices have risen in the past does not mean that the value of a house will continue to go up.

As with any investment, it is important to look carefully at the sort of returns on offer and the kinds of risks faced.

Do your homework

“Any kind of property investment can be lucrative, however careful consideration and homework is what needs to be done in order to make informed choices,” says Mario Volpi, sales and leasing manager at Engel & Volkers in Dubai.

Choosing what type of property to buy and where to buy it is the most important part of any property investment. Mr Sanger says he puts all of his cash into residential property in the UK because “the UK is a solid economy with great laws and processes.”

Mr Volpi, on the other hand, points to the opportunities to be made in Dubai.  “The World Expo 2020 in Dubai is understood to potentially welcome visitor numbers between 20 million to 25 million over the six months extravaganza, so investing in hotel or serviced apartments could be a wise move given there are not enough hotel rooms to cater for all of the scheduled visitor numbers,” he says.

“Investing in commercial real estate can also be a canny choice, however it is important to go buy wisely and go for A grade offices because there is a glut of mid-to-lower quality office space at the moment.”

Buy-to-let is the main way most investors put money into the real estate sector other than by buying their own home. The key benefit of this is that it provides a regular income, with a tenant paying towards the mortgage often used to finance a purchase.

Over time, investors hope that the asset will appreciate. However, on the downside, being a landlord can be a hassle when dealing with difficult tenants while constant maintenance can also be a drain on finances. “Void periods can be expensive, especially if this time is for a sustained period,” Mr Volpi says.

Instead of holding a property for a long time, some people choose to speculate on asset prices increasing. Known as “flipping,” this involves buying a property and then selling it on for (hopefully) a higher price almost immediately. This is, of course, a much faster way of making money and if a quick sale is managed, the potential headaches of void periods on maintenance issues of any tenant can be forgotten. However, this form of trading can be risky, potentially leaving an investor with a property that doesn't sell on their hands, and high transaction fees.

Another way of gaining exposure to property without the hassle of being a landlord is a fractional ownership scheme. A company will buy or build a set of apartment blocks then allow investors to buy them through the company. A single investor can own one or multiple units, but the company collectively manages the units and in return it takes a percentage from the monthly rent.

This has all the advantages of buy-to-let as an investment without the headaches and acts as a hedge against inflation. However, this type of investment comes with added fees and less control.

Gaining trust

Another alternative way of getting into the real estate sector without buying individual properties is to invest in shares of a real estate investment trust, or REIT. REITs are created when a corporation or trust uses investors’ money to purchase and operate income-generating properties.

Shares in REITs are bought and sold through all the major exchanges just like any other stock. The corporation then pays its shareholders a dividend. Again, the advantage of this is that it provides access to the property sector whilst avoiding the difficulties of leasing and maintenance. The disadvantages include the fact that an investor can still end up paying hefty fees, and share values can fall significantly below the value of the properties held. 

Another way to access the sector is by buying debt. This can be done either through investing in real estate company bonds or by buying up mortgage debt.

One way to do this is through mortgage-backed securities or MBSs. These are bonds that are backed by a pool of mortgages. The mortgage pool is then divided into ‘tranches’ with varying characteristics and risk levels.

MBSs hit the headlines in 2008 when the value of US properties plummeted and mortgage holders defaulted in huge numbers, leaving banks around the world painfully exposed.

However, the benefits of buying MBSs are that they are liquid investments which can be traded on bond markets and, as with bonds, they offer lower risk than equities and serve to diversify a portfolio.

In fact, some experts recommend buying MBSs in the aftermath of the 2008 financial crisis because they have such a bad rap in recent years. The non-agency mortgage space is a shrinking market with banks unlikely to be re-entering the market, in any significant way, soon.

(Reporting by Lucy Barnard; Editing by Michael Fahy)

(michael.fahy@refinitiv.com)

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