Q: Why do I need to put my eggs in several baskets?

Diversifying and Building a Portfolio..

Diversifying is simply a matter of hedging your bets. You may find a development that seems guaranteed to double in price, but to buy up as much as possible of a single development or area is risky. Any unexpected change in the market will endanger the whole, rather than a small proportion, of your investment.

The ideal approach is to split your investment and buy as large a range of property as possible. At some stage this may mean commercial and industrial property as well as residential. These markets are more complicated however, and price entry thresholds are higher. Most new property investors will prefer a first venture into commercial property to be in their home country.

For those people taking their first step into property investment, look instead for different kinds of residential property, and in different countries or different continents even. Because property markets are often localised (usually at a national level), buying in a range of countries helps to reduce your risk. Buying on different continents will reduce your risk exposure even more, by limiting the impact of regional events on your portfolio. In the late 1990s property prices plummeted across the whole of South East Asia. Property investors who had all of their investments in the region suffered significant losses. For those who owned South East Asian properties as part of a broader portfolio, the events of 1997 were less of a concern.

Even if you are absolutely devoted to a single market and determined to pick up as much as possible in the country of your choice, there are ways to diversify risk by buying different kinds of property. Dubai has been one of the favourite investment destinations of the last few years. In Dubai apartments have traditionally been more desirable than villas. This has caused many investors to concentrate exclusively on building a portfolio of apartments. In 2005 the market shifted slightly and villas became more desirable. One study suggests that between 2005 and 2006 villas appreciated up to 15% faster than apartments, a trend which is likely to continue. Those investors who have had the foresight to diversify will therefore benefit.

If your first property is in a sunny holiday resort, try to balance this with something in a city. If you have been busy buying up houses with five or six bedrooms, then balance your portfolio with a couple of one-bedroom apartments or studio flats. After all, the size of the family is shrinking and more people are living alone than ever before.

Part of this diversification is trying to put together a portfolio where the properties carry different levels of risk and will react differently as an investment in different circumstances. Put simply, it is the old adage of not putting all of your eggs in one basket.

Whilst diversifying your investment helps to reduce your risk, over stretching yourself can be equally damaging. If you only have enough money to buy one property, the best option is to buy something generating significant yields and then save that income towards your next property in a different market. Over time you will end up building a healthy, sustainable, low risk and diversified portfolio.

Collective Investment Schemes: Property Funds and Reits

For those with limited budgets, there are ways of investing in a portfolio of high quality properties without mortgaging everything you own. There are a range of collective investment schemes available which offer the opportunity to participate in large scale property investments for a relatively small amount of cash. Collective investment schemes operate like funds in which investors’ money is put together to purchase a range of properties.

Collective investment funds have numerous benefits, not least of which is that someone with only £20,000 (€35,000) to invest could gain access to the sort of returns only usually available with larger scale investments. Another benefit of collective investments is that they let people duck out of the process of researching markets, assessing when to buy and when to sell and all of the difficulties of finding and keeping tenants. They also allow people to invest in commercial and industrial property, the thresholds of which are set too high for most investors.

Different investment funds will have different objectives. Some might have the purpose of developing a resort or tower block allowing investors to make the same kinds of returns as developers, others may buy a range of off-plan properties from across the globe and flip them before completion. Whatever the purpose of the fund, its objectives will be laid out in a prospectus for investors to examine prior to committing their funds. The actions of the fund managers will be governed by the parameters set out in the prospectus, so you can be certain how your money will be invested.

Benefits of collective investment schemes

Opportunity to benefit from property without the hassle of organising buying, letting or arranging sales.
Your investment will be managed by experts
Opportunity to expose even small investments to a broad portfolio of properties and countries
Funds can use their buying power to arrange bulk discounts
Some funds have tax benefits. In the UK, investors can invest in many types of funds with money held in ISAs and even SIPPs (self invested personal pensions)
No sleepless nights over letting, tenants, vacancy rates and so on.