Property investment isn’t something you trade on-screen – it requires thought and careful measuring of the risks involved
If you choose to invest directly in property, how can you evaluate the risks? We all know the mantra: ‘Location, location, location,’ but, in fact, the experts say that location is really only one of the major factors in gauging the risk in a property investment.
One might, for example, look to the Shard tower in London, and wonder about the risks involved in that £1.5 billion investment which, when it opened this year, was largely untenanted. But the owners weren’t worried. “We have confidence in the London market and a long relationship with London,” said Sheikh Abdullah Bin Saud Al Thani, governor of Qatar Central Bank – the Qatar sovereign fund was the majority investor in the building.
And experts say they are probably right. “The Shard tower was a brave and impressive achievement,” comments John Slade, CEO of BNP Paribas real estate in London.
Slade is a great believer in the value of prime sites, where there are good demographics and solid industrial fabric to support them. Of these sites, around the world, there is currently a sufficient number to satisfy demand.
Strategy of analysis
Chris Taylor, CEO of London’s Hermes Real Estate Investment Management, says: “Our strategy involves undertaking detailed analysis of the retail location, the demographics and competition. Ideally, the scheme should be anchored by a major non-discretionary retailer of strong and undoubted covenant, such as Walmart.”
Timothy Murphy, CEO of the Hong Kong-based IP Global property firm, advises investors to look at fundamentals, “even if those fundamentals seem too obvious to consider first, when investing in a foreign market, make certain that the legal title to the property is sure. Some countries have uncertain legal systems,” he warns.
“If you borrow to invest, borrow in the currency you are buying the property in. Foreign exchange fluctuations can add very significant amounts to the cost of your loan, especially in the volatile markets that we see today,” Murphy points out.
Find a market
After that, it’s research, research, research, explains Marc Giuffrida, managing director of Capital Transactions at Knight Frank. “Find a market you have or want a connection with. Then find out what makes the city tick,” he insists.
“Look at where pricing and rents are today versus the long-term average. It’s not scientific but it does give you a feel for where you are in a cycle,” Giuffrida explains.
“Make sure your asset has a point of difference in the market it competes in. For example, if it’s retail – is there enough foot traffic and will it attract the right tenant base? If it’s logistics – is it near the right arterial roads and close to ports or rail links? If it’s office – does it provide tenants with the services and image they require?”
These are the kinds of questions that are part of the research that should go into property investment. But here is the most important message, according to Duncan Owen, head of Property Funds at Schroders Investment Management: “Real estate can’t be traded on-screen. That means you invest in it for the medium or long term. Think of three to five years as the minimum period, and have good, fundamental, long-term reasons for the choices you make.”