Property – An Essential Portfolio Element

To achieve and maintain a successful financial plan it is essential that you continue to diversify your asset classes throughout your lifetime. One of the most common and favourable ways to do this is via property.

Over the past few weeks we have begun to build a picture of how to accumulate investment assets and take a broad look at ways to protect these.

Once you have achieved a reasonable level of comfort with what you have in liquid terms you should certainly wish to consider the value of property. This is a long term asset and can be good for both capital growth and generating ongoing income. Despite the fact that there is very limited liquidity in the asset class, managed carefully it can be a very good long term addition to your net worth.

There are a number of ways in which you can invest in property making it an attractive proposition no matter your attitude to risk, time horizon and ultimate conversion of assets to income or capital in the future. This is partly a subjective matter although the wise investor will remove as much emotion from the decision making process as possible and concentrate primarily on the commercial terms and benefits.

So, what are the methods by which you can use to invest into physical property to your best advantage:

Physical property as your home
It is certainly a sensible thing to own your home. Most people like the touch and feel of the physical asset and the sense that they have something real they can call their own. There are also advantages where you can reshape your house or apartment into the home you most desire without reference to anyone else, whilst adding intrinsic value to the asset. At a point in time in the future you can sell this valuable asset if you wish to move to a different country or simply because circumstances warrant a change.

Some expats buy homes in the counties in which they are posted and then let them when it is time to be posted on again allowing them to receive income to cover running costs and benefit from the eventual capital appreciation. This is a great idea because you can convert your property into cash in the future and hopefully realise a good price. But beware, resale markets have a habit of not always being advantageous when you really need them to be.
Physical property as an investment
As well as leaving homes behind when moving on, some invest into property specifically as an investment venture in an attempt to create meaningful income and capital appreciation over time. Many call themselves “buy to let investors”. Usually they have a portfolio of property which makes up the vast majority of their wealth. Be wary of doing this unless you have made a definite decision to follow this path because there are a number of pitfalls which can ruin your little business venture. Scarcity of tenants, declines in rental markets and difficult resale markets are some of these.

In either of these types of purchase it will be almost essential that you leverage off the property value to raise sufficient capital to buy it. Mortgages are relatively commonplace these days although in the last few years there has been a tightening of loan funds available and borrower criteria is narrowing. Because these are long term investments with finance gearing it is best to consider a purchase as soon as sufficient reserves allow you to place a meaningful deposit and secure the finance.
Property investment funds
Others may prefer not to tangle in the risk of the longer term tie up of capital. For these investors there is a solution in mutual funds which specialise in property investments. With a substantial number of funds available today you are able to diversify into any geographical area, type of property, such as commercial buildings or residential types.

One of the beauties of these types of investment is the liquidity. Although there can be restrictions on redemptions from investment funds you are not attempting to sell a single specific property so your wait should be relatively short.

Real Estate Investment Trusts (REITs) are also real possibilities in this asset class. These specialise in creating income from certain types of property.

There is also a relatively new type of fund called student accommodation. These funds exclusively hold accommodation units in university towns and the basis of their success is the rental yields that come from the units. There are little if any rental bad debt as it is collected upfront, and there is currently no shortage of student tenants wishing to rent for their tenure at university. The vast majority of these funds are based around the UK student market although the idea is now developing elsewhere.
Fractional ownership
This type of ownership is particularly useful to the investor who prefers to make personal use of his asset for a second or holiday home. Unlike the old fashioned time share model you actually buy a share in a physical property rather than just the use of a pool of properties each year. Of course your fractional ownership will allow you access to your property for periods in accordance with the percentage you own each year. This affords you free annual holiday accommodation for a long period of time.

One criticism of this in the past has been the fact that you are not able to sell your share easily when it comes to a desire to exit. This has been overcome by payment of a 6% investment premium over the initial price which converts to a guaranteed buy back at your original purchase price after a fixed term. This single factor makes the asset class a great deal more attractive as you get excellent accommodation virtually cost free each year and a secure exit strategy at the end of the investment period.
Direct student accommodation ownership
Launched last year this relatively new class of property investment is particularly attractive because it allows you to own physical property, currently in the UK, without the hassle of engaging an agent, arranging tenants, compliance with landlord legislation, collecting rent, arranging insurance and relying on others to care for your property in your absence.

These units are managed by the specific universities where they are situated, who find the student tenants, manage to properties, collect the rent and ensure that the development as a whole is well cared for and maintained. There is also a relatively low entry cost at around £30,000 per unit and net returns are something like 8%pa.

Any property which generates an income and has an upward capital value trend is probably an essential part of your asset diversification. Rents tend to increase in line with inflation whilst your investment also generates good solid capital growth over the long term, which also tends to keep up with inflation. This is certainly a win, win situation for most expats.

In planning toward your eventual financial independence structuring property assets within your portfolio will afford you great income potential to compliment your investment returns. Getting the right mix can be difficult and expats will often slip up with their choice of type and geography. It is thus important that proper planning be carried out so that your assets work for you rather than you struggling to fit them properly into your overall strategy.

Questions to the author can be directed to PFS International on +66 (0) 2653 1971 or email to enquiriesthailand@fsplatinum.com.

Andrew Wood has been an expat in Asia for 32 years and is a Senior Consultant with PFS International. He has been writing Net Worth articles for four years and has made a significant contribution to the PFS library of financial service articles dating back over seven years. These articles which cover the complete A-Z of financial planning are available to readers on request.