The continuing lure of investment properties
By Robert Bailey, Knight Frank
WHETHER IT'S AN OFFICE building in Singapore, a chateau in France, or a townhouse in central London, investing in property is a powerful attraction for people around the world.
While equities, bonds, and fixed-term investments should make up the bulk of a well-diversified portfolio, real estate can play an important role. People invest in property to provide steady income from rent, for the potential for capital appreciation, and because of its low volatility, which tends to reduce overall portfolio risk.
Factors to consider
The challenge with investing in real estate is that each property is one of a kind. Such factors as geographic location, physical structure, and potential tenants, for example, are unique. Your analysis of the property's investment value must take all of its unique features into account.
You also need to consider the country's currency differences and fluctuations, as well as the country's economic health.
The purchase and sale of real property is a negotiated transaction, which can be complex. There may not be a pool of buyers when you want to sell, something that equity and bond investors take for granted.
A non-liquid asset
Real property is best suited as a medium- to long-term investment because it can take many years for the value of property to be fully realised.
While the value of equities can be influenced by economic events in other world regions, the value of real property is related primarily to the strength of the domestic economy. That's why location is a crucial concern when evaluating property investments.
With so many regions in an economic slump, and the prospects for a quick recovery unsure, certain locations are a prudent choice for current investment purchases. These include major world centres, such as London and Paris, and key tourist and resort areas, such as the south of France, the Tuscany region of Italy, and Costa del Sol in Spain.
Keep expectations in check
Investment returns in most areas can be similar to the stable and predictable returns of high-grade bonds. Most investors enjoy a steady flow of income from rents, and the potential for capital gains over the longer term.
Again, one of the keys to successful property investing is patience. The growth in a property's value may not be realised for many years, and there may be slumps in the market along the way. Thus, an investment time horizon of at least 10 years is recommended.
Develop an ownership strategy
While direct ownership is one way to hold a chosen investment property, it's not necessarily the best way.
"There are a number of owner-ship options that individuals should consider," says Michael Cadesky, Managing Partner of Cadesky & Associates, a Toronto-based firm specialising in international tax and estate planning. "The most advantageous ownership structure for holding investment property will depend on where you and your property are located, your use of the property, and any tax and estate planning issues you wish to address."
For example, since most investment properties will generate rental income, using a holding company may be an effective means of holding property. But if you begin using the property for your personal use, there could be tax consequences.
Here is an overview of alternative ownership structures that may be available to you.
Joint ownership. In many situations, joint ownership can reduce or eliminate potential estate taxes and provide an ease of distribution upon death, because the title can pass directly to the survivor, rather than being distributed through the estate.
Holding company. A holding company can be established in your home country, an offshore location, or in the country in which your property is located, depending on your financial and estate planning goals. Holding companies are often used with an international
trust to minimise tax and estate consequences.
Trusts. A trust can be created during your lifetime or under the terms of your will. Often, a trust can lower probate fees and taxes for your estate, ease asset distribution, and lower the tax burden for your beneficiaries if the property generates income.
There are many variations on these arrangements. A structure that's appropriate for you will depend upon your personal circumstances and upon the country in which you wish to buy property.
Robert Bailey is a Partner with Knight Frank, one of the world's largest and most established firms of property consultants. You can contact him at robert.bailey@knightfrank.com.
Buying investment property?
Tips
- Get local advice. You'll need to understand taxes, rental prospects, and succession laws.
- Consider your ownership options carefully (for example,
direct, joint, trust, or corporation).
- Consider property that combines the benefits of a stable domestic economy with tourist or resort appeal.
- Consider diversifying your property investments by buying in different locations, and buying different types of property.
Traps
- Don't buy for the short term. It typically takes years for the full value of property purchases to be realised.
- Avoid buying in emerging markets during periods of economic uncertainty. The risks are magnified, and economic downturns in these countries can be severe.
- Don't do it yourself. Professional advice can ensure that you maximise the investment potential of your property, and avoid the pitfalls that are unique to each particular market.
Managing your wealth
The attraction of classic autos is easy to understand, but are they a good investment?
Recently, some particularly rare cars fetched auction prices in the millions of dollars. For most enthusiasts, however, the true value of owning a classic car lies in using it. Maybe they drive it 1,000 miles across America, or show it in five car events in a year. In the end, they may make 10% on the car, or lose 10% on it, but the enjoyment they derive from it is beyond dollar value.
From a financial perspective, however, here's what you need to know.
The current market is relatively stable, as it is dominated by car enthusiasts. In contrast, 10 to 12 years ago, speculative investors dominated, making the market volatile.
An investor can easily enter the market with a budget of US$30,000 to US$40,000, but the initial investment is just the beginning. The car will also need regular maintenance and protection (insurance).
To increase the potential for long-term investment gains, look for cars that are rare, have some form of racing connection, and have a very good maintenance history. Shop around, and don't rush in and buy the first car you see. Check the Web sites of the auction houses for specialist car departments.
Rupert Banner is a Specialist in Motor Cars and Head of the London Department of Motor Cars at Christie's Auction House. He can be reached at rbanner@christies.com.
Three sectors to keep your eye on
The downturn in the world's economy has had a different impact on three economic sectors.
Oil slips on economic slowdown
By Chris Beer,
RBC Global Investment Management Inc.
Growth in worldwide demand for oil could turn negative this year, given already weak economic growth and the recent tragic events in the U.S. The historic average price for oil is about US$20 to US$21. Prices were shored up in 2001 by aggressive production cuts made by the Organisation of Petroleum Exporting Countries (OPEC).
Given continued economic weakening, however, market and political concerns may prevent OPEC from making more production cuts in the near term. OPEC will need to weigh its members' needs for higher oil prices against the rest of the world's need for lower prices in an economic downturn.
Global demand for heating oil usually increases in the last quarter. The events of September 11th, however, have negatively affected the demand for jet fuel. This could cause oil refiners to begin making heating oil and distillate sooner than expected, increasing oil product inventories as we head into winter.
While near-term weakness remains a possibility, many oil stocks look fundamentally attractive. If global demand resumes its historic average growth rate of 1.5% to 2% and non-OPEC supply remains constrained, the sustainable price of a barrel of oil could approach US$23, with attendant increases in revenues and profitability for oil companies.
Given high levels of industry consolidation and associated cost reductions, debt at its lowest level since 1983, and major share buybacks, the longer-term outlook for the oil industry is actually quite positive.
Deregulation powers utilities
By Christine Poole,
RBC Global Investment Management Inc.
The deregulation of electricity, gas, and water utilities will continue in North America and Europe, making the sector more susceptible to supply and demand fluctuations. This means that earnings growth will become more volatile and less predictable than when utilities were entirely regulated.
In fact, the independent power producers in North America have aimed for aggressive earnings growth and expansion, not steady dividends. Momentum investors jumped on these stocks when the California power crisis showed demand outstripping supply, but moved on as the price of electricity declined. Longer- term, deregulated utilities may all, eventually, be seen as growth stocks.
For the short term, utilities are still interest-rate-sensitive, with their yields becoming more attractive as interest rates fall. Despite the larger drop in interest rates in the U.S., European utilities have performed somewhat better, largely thanks to greater cross-border mergers and acquisition activity in the euro-zone.
In North America, corporate activity has largely been confined to regulated utilities that want to spin off their non-regulated subsidiaries.
Looking further ahead, there are some concerns that the flurry of generation activity in North America will eventually lead to a glut in supply in a few years.
In the very short term, since the terrorist attacks in the U.S., the best performing stocks have been the more defensive, highly regulated companies that still provide a good dividend yield.
Slump hits capital equipment
By Christine Poole and Paul Johnson,
RBC Global Investment Management Inc.
The industrial equipment companies that supply the power generation industries in North America and Europe have performed quite well in the past few years. This is partly due to increasing deregulation of utilities and partly due to the skyrocketing demand for power, driven by economic growth.
The increase in demand for power generation resulted in large orders for such companies as gas turbine manufacturers. The continuing deregulation trend looks positive for these firms over the next few years.
However, capital equipment firms supplying the manufacturing sector have been hit hard by the slump in demand for manufactured goods.
In July, the Purchasing Managers Index (PMI) showed its 12th consecutive month of decrease. The capital equipment manufacturers in Europe and Asia have suffered from a similar slump in demand. In addition, there has been only marginal merger and acquisition activity.
Because this sector's overall performance is linked to economic growth, the outlook will improve only when manufacturing picks up again. Until then, companies will continue to focus on cutting costs.
This article was prepared in early October based on information available at that time. For further information, please refer to Global Investment View, which includes an analysis of the stock, bond, and currency markets. This publication is available from your Relationship Manager, by completing and returning the enclosed Fax Back form, or by visiting our Web site.
Reach beyond borders
With the outlook for the world's bond and equity markets remaining unclear, a return to investment basics could be a wise course of action - and portfolio
diversification should be at the top of the list.
Diversifying your portfolio into more than one geographic region allows you to tap into the potential upside in any world market, while reducing potential risk.
International equity or bond mutual funds offer substantial benefits to investors who are looking to diversify internationally during uncertain times.
Instant diversification. Global equity and bond funds invest in stocks or fixed-income instruments in a specified geographical region - or in several regions around the world.
Professional management. This meant active management by
a professional fund manager with access to current, in-depth research. The manager performs a thorough analysis to select the most promising individual stocks and bonds in each region, or from around the world.
The fund advantage
Royal Bank of Canada Global Funds offer international investors a range of international bond and equity classes that invest in securities from around the world.
In addition to instant diversification and professional management, Royal Bank of Canada Global Funds' equity and bond classes offer the following advantages to investors with a minimum of US$10,000 to invest:
Currency diversification. Some of the global funds are denominated in various international currencies, such as Swiss francs, pounds sterling, and U.S. dollars, to protect your investment from currency depreciation.
Flexibility. Because there is no front-end fee and no fee for switching classes (apart from the bid-offer spread), you can react to any changes in the world's markets without affecting your return on investment.
Are you adequately diversified?
With continuing uncertainty in the world's markets, international investors may want to consider a global equity or bond fund to meet their long-term investment
goals.
If you would like more information on Royal Bank of Canada Global Funds, please talk to your Relationship Manager, or complete and return the enclosed Fax Back form.
Good news travels fast
Over the years, Royal Bank of Canada Global Private Banking has grown in size and strength. This success is largely a result of our clients' referring us to their colleagues, friends, and family.
We rely on our clients to spread the word. After all, a recommendation from a satisfied client is the best way to make your business grow.
Currently, we offer private banking and wealth management services to customers in more than 150 countries, through our network of offices in 22 financial centres around the world.
We extend thanks to all our clients for their support. If you would like to refer a potential client to Global Private Banking, we would be happy to hear from you.
Please complete and return the enclosed Fax Back form, or contact your Relationship Manager directly.
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