The Concept of Global Property Investment - Coursework Example

Diversifying across residential properties in London 3. Sub-period analysis Sub-period of poor performance (2000) Percentage Av.returns 8.33% 8.33% 8.33% 8.33% In the year 2000, ken/Holland residential market yielded a total return of $1404. The mean return for the period was $(1404/12) = $117. The average return can as well be calculated as a percentage of the total return of the period as (117/1404*100) to 2 decimal place 8.33%. South ken residential market yielded a total return of $1255. The average return was (1255/12) = $104.58. This average return is (104.58/1255*100) = 8.33% of the total returns of the period. Chelsea generated a total of $1440 during the period (Huber et al., 2006). On average, it produced (1440/12) = $120 per month. This is (120/1440*100) 8.33% of the total returns generated over the period. Fulham residential market generated a total $1243 over the year. The average return as per month can be calculated as (1243/12) = $103.58. Average return as the percentage of the total returns is computed as (103.58/1243*100) = 8.33%. To calculate the percentage deviation from mean, you subtract the average return from the monthly returns for example in 2000, the total returns was $1404, the average return was $117. The month of january generated $100. To calculate the deviation, we subtract $117 from $100 to get a negative deviatio of $17 (-17). The percentage deviation is therefore calculated as (-17/1404*100) = -1.210826211% to 2 decimal places I get -1.21%. Note that: average return is only used to calculate the deviation in terms of returns but to calculate the % deviation, we devide the deviation return by the total returns then multiply by 100. Alternatively, we can calculate the average return as the percentage of total return as (117/1404*100) = 8.33% and take for example month of january, calculate its percentage of the total return as (100/1404*100) = 7.12% therefore, the % deviation is calculated as (7.21% - 8.33%) = -1.21% this is computed for the rest of the months to get the percentage deviations. The standard deviation (SD) is computed as (%deviation)^2/n where n is is the number of months which is 12 in our case. The standard deviation for ken/Holand for the year 2000 is computed as (-1.212+-0.852+-0.282+-0.362+12+0.432+0.52+0.142+0+-0.142+-0.362)%/12 = 0.35% The rest of the standard deviations (SD) of resdential markets are calculated through the same procedure. The same creterion/procedure of calculating the average returns, the average percentage returns and the standard deviation applies to the subsequent sub- period of good performance. Sub-period of good performance (2012) The expected average return (profits) for period of good performance Percentage mean 8.33% 8.33% 8.33% 8.32% The expected standard deviation SD (possibility of a loss) The key differences in the risk/return performance of the naïve portfolios Statistics Ken/Holland South ken Average 8.33% 8.33% SD 0.35% 0.12% If a risk an investor is not risk taker and decides to invest in either ken/Holland or south ken, Expected return will be 0.5*8.33% + 0.5*8.33 = 8.33% from one of the residential market he/ she will choose to invest. Expected risk SD is = 0.5*0.35%+ 0.5*0.12 = 0.235%. This is the expected loss from the investment of choice. Therefore, whether an investor invests in Holland or south ken, the loss will be 0.235% of the total returns Statistics Chelsea Fulham Average 8.33% 8.33% SD 0.51% 0.12% If an a risk averse investor tries to invest in either Chelsea or Fulham, then the expected return one expects is =0.5*8.33%+ 0.5*8.33% = 8.33% of the total returns of each residential market the investor will try to invest. Expected risk will 0.5*0.51%+0.5*0.12% = 0.315% of the total return of the period from each residential market. From the above data, that we have the same returns 8.33% but different risk level. Portfolios with more risk than others markets so invest in less risky investments (Baum & Hartzell, 2011). For instance, an investor can invest in south ken and Fulham. The risk/return performance in good performance given naïve portfolio Statistics Ken/Holland south ken Average 8% 8% SD 0.25% 0.17% The expected return (profit from investment) = 0.5*8%+0.5*8% = 8% of the total returns of an investment of choice. The expected risk (loss from the investment) 0.5*0.25+0.5*0.17%= 0.21% of the total returns in a given period of an investment. Statistics Chelsea Fulham Average 8% 8.32% SD 0.25% 2.20% The expected return is 0.5*8%+0.5*8.32% = 8.16% of the total returns for the period of either residential market of investor’s choice. The expected risk is 0.5*0.25%+ 0.5*2.2% = 1.225% of the total returns will be the predetermined loss from the residential market of his/ her choice. An investor will invest in an investment with the lowest risk and high returns. The individual residential markets analysis of the sub period of bad performance From the analysis, Chelsea residential market has the highest returns (profits) averagely $120 per month closely followed by ken/Holland with average return of $117 per month, then south ken with $104 per month then lastly Fulham with $103.58. on the other hand, Chelsea registered the highest possibility of a loss which is 0.51% of the total returns. Ken/Holland residential market followed with a risk of 0.35%, then Fulham 0.21%of total returns and finally south ken with a risk (SD) of 0.21% this shows that Chelsea residential market has the highest returns and the highest possibility of a loss too. Fulham had the lowest average returns and at the same time being among the residential markets with high possibility of losses. If one is a risk taker, then Chelsea is the residential market to invest during the poor performance. The risk averse investors should invest in south ken because it has the lowest possibility of a loss as compared to the rest of the markets (Huber et al., 2006). The analysis of the sub period of good performance In the good performance period, again Chelsea has the highest returns of $304, followed by ken Holland with average returns of $275 per month, then south ken with average returns of $255 per month and lastly Fulham residential market with $190. Fulham registered the highest possibility of a loss with 2.20% of the total returns, followed by ken/ Holand, then Chelsea with 0.25% and lastly south ken with 0.17%. Investors are therefore, advised to invest in investments with the lowest possibility of losses in order to earn profits. 4. Limitation Despite the sheer realization that some residential property in the UK offers a perfect investment portfolio (efficient frontier), investors are still suspicious to invest in the UK residential property market not because of the investment risks calculated above or the inauspicious returns but due to other factors. Apparently, some investments perfectly fit the market that provides institutional diversification benefits, are best hedges against inflation, and have the best portfolio performance. These factors impede investors from investing in the efficient frontier in residential property and opt to invest in other investment portfolios such as shares and bonds. A) Lack of a tradable vehicle that is tax efficient; investors find it straightforward to build over £100M in commercial portfolios in a short duration as compared to the duration that it would take to generate an equivalent amount in residential property (Dissanayake, 2012). This is due to the high risks involved in the residential sector. It is therefore constructive to allocate funds to securitized property that have an apposite liquidity, satisfactorily managed, and have a competent quality. These risks make it essential to invest in alternative assets that offer a greater risk diversification (Baum & Hartzell, 2011). Moreover, direct investment in residential property creates a close investor-tenant relationship that can sometimes be unenthusiastic and demoralizing, thus creating negative publicity. Investors, therefore, chose to invest in other assets due to the UK government failure to impose legislations that would sufficiently protect investors in residential property and ensure that they reap maximally. B) Unnecessary government intervention; during several years of vociferous government action, residential investors were squeezed out of the UK housing industry a factor that drastically resulted to financial loss to the investors and unenthusiastically impacted on the UK economy due to withdrawal of investments. Currently, the through regulation of the PRS (private rented sector), the government still controls rent. Apparently, this hampers investment in residential property. Moreover, being an asset that is politically and socially sensitive, residential property faces high risks that are prevalent in the political arena. C) Taxation; the tax authorities in the UK region are subjecting PRS investors to double taxation on capital gains and on rental income. The sheer effect of increased taxation is a reduction in profit; notably residential investors are driven by the profit motive and reduction in profits unquestionably calls them to re-evaluate their investment portfolios. Moreover, PRS investors do not recover any cost should tenants abscond rent or abuse the framework and/or structure of the property. Devastatingly, not tax benefits are offered for initial rehabilitation costs while VAT for most inputs cannot be recovered. Evidently, the UK offers little material and psychological support to PRS investors, thus many prefer not to invest in the bland region (Dissanayake, 2012). D) High transaction costs; in residential, the cost of evaluating the investment, agent fee, land, major inputs (such as bricks, blocks, cement, and metals), and the cost of making the decision are conspicuously high. Moreover, the UK experiences a limited supply of major inputs in the building and construction industry including blocks of flats, a factor that increases the cost of construction and delays the payback period of the investment. The high cost makes the investment contemptible since it is not an ideal investment alternative for moneymaking assets (Baum & Hartzell, 2011). E) Tainted reputation; most people recognize landlords to be merciless “fat cats” that are effusively determined to rescind the lives of innocent civilians expressly the poor old ladies. They perceive this to be unacceptable in capitalism and that property owners are out to promote it. With such prejudices and bigoted beliefs, it is disapproving to invest in residential property in the UK. Such a negative perception has led to people taking little interest in residential property management a factor that further disadvantages potential investors. F) High tenant mobility and voids; the tenant mobility in the UK is currently 9-10 months and the voids are approximately 7.5%. The time that elapses before getting another tenant is high and an additional cost to the investor (Huber et al., 2006). Moreover, maintenance of the property is done at the proprietor’s cost and letting agencies hired to speed up the process of re-letting the apartments. Such costs are disheartening and a rational investor ought to avert them. 5. Conclusion and recommendation From the above elucidations, it is ostensible that the UK residential industry is multifaceted and requires rational decision making before devoting funds into the industry. PRS investors should invest in an efficient frontier, which is a combination of auspicious investment options. Investments with high returns and low risks are preferable for risk averse individuals, a common feature in PRS investors. However, apart from risks and returns, other factors affect investment decisions in residential property. These factors include taxation, fouled reputation, government interference, high tenant mobility, and high transaction costs. To encourage investment in residential property, the UK government should reduce taxes levied on construction materials, source for suitable housing stock, fully support PRS investors, and minimize unnecessary interference in the industry. Additionally, it should reduce conversions and modernizations of the current housing stock since they skyrocket property management costs and frights large-scale investors. Bibliography Baum, A., & Hartzell, D. (2011). Global Property Investment: Strategies, Structures, Decisions. Chichester, West Sussex: Wiley-Blackwell. Dissanayake, D. M. (2012). Savings and Investments: Theoretical Underpinnings of Investment Theories of Finance and the Taxation Regime on Investments in United Kingdom. Huber, W., Pivar, W., & Messick, L. (2006). Real Estate Economics. Covina, Calif: Educational Textbook Co. Read More