7 thoughts on diversifying your property portfolio

Spinning Plates

Spinning Plates

Diversification of investments is of course, instinctively a good idea. The basis for this is to spread your capital into a range of asset classes so as to “hedge” against one particularly type of investment rather than the sense of putting all one’s eggs in one (or very few) baskets.

But as with most aspects of investing, the story isn’t quite that simple…

Imagine you are a traditional, experienced private property investor with a high proportion of your total assets in property and wanting to away from purely property related opportunities.

In general terms this is a sound strategy. I would say that some additional factors should always be borne in mind. Here are 7:

1. While never the only game in town, real estate is still known to be the most resilient and secure of assets in developed countries. The right balance of different property sectors in a portfolio can give a powerful hedge without unnecessarily introducing unknown variables into the equation.

2. One key objective of diversification is to reduce risk of loss. But there are caveats to think about: 

  • Unless this is done with an investment that has a similar or better risk-profile and the market sector is equally well-understood by the end buyer, diversification could actually increase the riskiness of the investment portfolio, outweighing the hedging against the rest of the portfolio. 
  • Your years of experience in property is a strong advantage not to be taken for granted.

3. Another reason for moving away from further property sector investments would be, that once with a solid property base, take on some more “riskier” speculative investments whether in real estate or outside, with a hope of higher returns. With “safer” investments under one’s belt the capacity for loss on others is greater, having those solid real estate based investments to fall back on. depending on the property portfolio you already have, it may actually be worth adding or trading into more solid property investments. For example adding residential to your commercial property portfolio or vice versa. Check out our article on Taking Control of Risk.

4. With a solid bedrock in the portfolio, you are then in a good position to look at buying share equity into a property development company, or perhaps acting as a secured lender via a fixed-term mini-bond. This changes your landscape as you need to be adept at researching property businesses and carefully analysing the legal structure around the agreement you enter into. An upside is that entry is straightforward and exit is after a fixed term, usually without transaction cost. The danger of being too easy, is that there is no obligation for you to carry out full due diligence. But in my experience it is absolutely vital you do so.

5. So how do you safety-check a successful, growing, ambitious property developer before investing? Analyse their business plan, their accountability and their track record. Are they serious about growth and highly capable of achieving it? That’s down to careful recruitment of key personal in all areas including finance, a sound growth strategy combined with the core property development expertise, a board of repulatble directors and equal skills at bringing the right key people on board.

6. A prudent developer balances its portfolio with a mixture of lower and higher yielding investments and a mixture of short, medium and longer-term maturities from investors like you to maintain the appropriate balance between risk and return. 

7. This balance for a small/medium sized property developer can be realised by simultaneous involvement in two or more of Commercial Retail and Industrial developments, Hotel & Hospitality sectors and build-to-rent residential. It’s pretty easy to investment in multiple such companies especially wise when there is a healthy diversity between the different company’s operations, all within the world of property we know and (deep down!) love.

Why are Property Bonds growing in popularity with investors and developers?

With us living longer, pension funds are not giving many of us the financial future we planned for, and other ways are often sought to grow financial nest-eggs to top up that future income. Bank savings accounts aren’t delivering on that either…

So is there a place in a portfolio for Property Bonds – for those of us that would rather be the lender than the property developer?

With good Property Bonds, you team up with an established property developer in a Joint Venture. But there are none of the set-up costs for the bond holder that you would normally associate with a direct property development project, or the advisor fees that come with buying traditional regulated investments: all of your capital goes to work for you.

Here are a few other key reasons to consider profiting from Property Bonds:

  • Property is seen as a secure asset class and with not enough homes being built in the UK demand continually outstrips the supply.
  • There are more and more obstacles in directly owning investment property. Heavier taxation for residential investment property and reduction of tax reliefs for expenses; difficulty in raising mortgage finance for buy- to-let; dealing with tenants; licensing; regulation, the possibility of rent controls; the list goes on). Many property investors are looking for less hassle and more profit: being the lender, not the landlord.
  • As part of this movement, investors who are cash-rich and time-poor are looking to partner with developers by lending rather than getting directly involved in the day-to-day running of projects.
  • In uncertain economic times a predictable fixed income for a known period of time has much appeal.
  • Whilst no investment is risk-free and they’re not for everyone, a well-chosen Property Bond can offer credible security and a practical exit strategy should things go wrong with the developer.

Learn how to spot a good property bond, and those to avoid. All this and more is covered in our Property Bonds guide – grab your copy today:

[eBook] Property Bonds – a brave new world of property investment?

There is a lot of talk about Property Bonds as a new, simple and secure way of enjoying bank-beating returns without the hassle of direct property ownership. But choosing from the growing list of advertised products can be a minefield.

So to help you learn about this new approach to property investment, I’m delighted to announce we’ve written a great new guide which you can download now for free.

Over the last couple of months we’ve been very busy behind the scenes studying the Property Bonds market place. As bonds become more and more popular with medium-sized property developers as a way of generating finance for their projects, we are set to see more and more bonds and loan-note investments being offered.

Our findings have been fascinating.

The choice of property bonds is already somewhat bewildering, and the range of quality and safety is wide. We have discovered that there are some excellent offerings available today with very reputable property developers, business models and bond structures that offer investors strong but realistic returns, with investor security at the forefront.

But not all such bonds are equal. It has concerned me greatly that very high rates are being advertised in some cases to attract investor interest but when we apply the weight of our due diligence processes, many leave a great deal to be desired.

We’re sharing our knowledge with investors, and showing them how to discern the good products from the mediocre as well as providing our own critique and expert guidance to them. 

To find out more about the world of Property Bonds, you can download our Special Report today…