Diversifying into the residential real estate market has been simplified by the creation of The Property Investment Market (TPIM). TPIM allows investors in the U.K. to buy shares of rental property in the same way that U.S. investors buy shares of businesses in the stock market.
This approach is a direct answer to stock traders who preach that real estate is illiquid and has a high cost of entry. TPIM investors can buy shares of rental property in the U.K. for as little as £1, with average annual returns of 11.32 percent on mortgage-free property and 23.25 percent on mortgaged property, according to the Association of Residential Letting Agents’ Review and Index for Residential Investment Q2 2007.
Becoming a TPIM member is free; money only has to be deposited into the online accounts if the investor is planning to buy shares of a property soon. The rental properties are managed by professional property managers on behalf of the investors.
Shareholders receive a portion of the rental income quarterly, similar to stock dividends, and may choose to sell their shares at any time. TPIM charges a 1 percent fee for all transactions.
For a building to enter the TPIM market, investors can preorder shares in a new property and the offer remains open until the money is raised or the time limit exceeded. When enough money is raised, TPIM buys the property and investors can begin selling and buying shares. If enough money isn’t raised, the deal falls through and investors get the money from their preordered shares back.
By fractionalizing the rental real estate market in this way, TPIM has opened up the bullish U.K. housing market to a much larger audience. Instead of paying the average cost of £354,529 for a home in London, according to the BBC, individuals can invest as much or as little as they want using TPIM’s fractionalized market. Average citizens can now profit from the 4.9 to 8.5 percent yearly appreciation that wealthy real estate investors have been enjoying (appreciation amounts are from London and Northern Ireland, respectively, according to the BBC). For instance, according to a statement from TPIM, a rental property in Horden was recently valued at £60,000. The building was originally purchased at £45,000 in November 2006 with plans to refurbish when the original tenant moved out. The unit is about to be refurbished and has seen a 33 percent increase in value.
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Investors can diversify their portfolios significantly by investing in different regions of the U.K. Regional markets can be variable and volatile but investors in TPIM can diversify across a number of markets, rather than just one or two, as a rental property investor would traditionally do. This makes the investment much less risky, as spreading investments across the U.K. will avoid some of the variability and volatility of local and regional markets.
TPIM’s rental property investments are only open to investors within the U.K., but TPIM is looking to expand its rental property holdings to overseas markets in late 2007.
“We plan to take our exchange worldwide and believe it will be equally successful since property is universally understood,” Stephen Kenny, TPIM’s chief executive, said. “At present we cannot accept overseas investors, but we expect this to change in the near future as the exchange is rolled out overseas.”
There are some downsides to investing in the rental real estate market in this way. In the same way investing in the stock market is risky if stock prices collapse, investors could lose a lot of money if the U.K. rental market goes south. To curb this risk, investors can choose to buy non-leveraged properties. This is a stronger possibility in places where the property market is skyrocketing and may experience a bubble burst similar to the ongoing U.S. housing market crisis. However, compared to stock market corrections, housing corrections are historically less volatile.
TPIM has only 15 properties which investors can actively buy and sell—a relatively small pool to pick from, though the company is working on bringing more properties into the market.
“The U.K. market has been consistently strong over the last five years especially in terms of buy-to-let,” Kenny said. “Although the current situation in the global finance markets is causing concerns in financial markets, the property sector in the U.K. continues to be a good investment.”
Of course, there is also the 1 percent fee TPIM charges on every transaction, which can eat into an investor’s returns over time. Investors are not allowed to hold more than 10 percent of the shares in any one building. Because an investor can’t own a controlling share in the building, investors become subject to the whims of the other owners and have to rely entirely on the property management company TPIM employs for management. Additionally, an investor is more easily subject to market hype in this type of environment in just the same way that stock prices fluctuate based on media coverage of the ups and downs of businesses involved in the stock market.
To avoid some of these problems, the properties are leveraged at different rates. “Some properties are completely ungeared while others are up to 55 percent geared,” Kenny said. “We have done this in order to provide a spectrum of risk to suit different investors. Where properties are geared they have higher contingency funds than ungeared properties in order to cover potential rental voids.”
Still, TPIM is an innovative idea that makes the real estate investment market a lot more attractive to smaller investors and those concerned with liquidity.
While the strict securities laws in the U.S. mean that U.S. investors shouldn’t hold their breath waiting for a property investment market to become available domestically any time soon, there remains a possibility that TPIM or another provider could expand to allow for U.S. investors.
All information about The Property Investment Market was gathered from their website at www.thepropertyinvestmentmarket.com.
