01.06.09 A DIFFERENT PATH

While it may be stating the obvious, one of the key objectives when making any monetary investment is to ensure the rate of return is maximised.

Historically, investors of a more risk-averse nature have invariably concentrated on the deposit of funds within banking institutions, safe in the knowledge their cash was (hopefully) secure and the interest receipts were steady if not always spectacular.

However, the falling Bank of England base rate over recent months has now resulted in what has become for many as wholly unacceptable return on their investment, with no expectation of any quick recovery. In light of the above, perhaps the time is now ripe to look at a possible alternative.

Working as an accountant in general practice, I am aware of the growing opportunity to invest in the commercial property market. Those of you still drawing breath at the boldness of this statement in the current climate, please read on.

Why buy?
Over the past few months, there has been (and remains) a growing belief that careful investment in the commercial property market will offer opportunities to those currently disillusioned with the bank's diminishing rate of return. But what makes the proposition worthy of further investigation?

With a typical bank deposit, the return is limited to the receipt of interest, with no growth in the capital sum that was initially deposited - whereas investment in property yields in theory not only a rental income stream but also, with favourable market conditions, capital growth.

It goes without saying the correct property type needs to be identified. Even with the current level of depressed prices, the average dentist is unlikely to have adequate funds to purchase units within any primary location and as such, the preferred location will drift towards secondary towns where there is preferably an existing reputable tenant.

Market research has indicated such opportunities will arise over the coming months, with many predicting prices with bottom out late in 2009 as a host of 'distressed assets' become available.

Show me the way
If there is a willingness to proceed but inadequate funding levels present obstacles, banks can be approached to help fund the venture.

It is also possible for a group of investors to come together to create a property investment fund. The principle works in exactly the same way except the group enjoys the benefit of greater buying power. Every group needs a leader, however, and you should make sure the individual heading up your group has a proven track record within the property market.

It is also important you fully research the financial aspects of your investment. One commonly used measurement of success is the internal rate of return (IRR), defined in some cases as the interest rate received for an investment consisting of payments and income that occur at regular periods.

A project is a good investment proposition if its IRR is greater than the rate of return that could be earned by alternate investments of equal risk (investing in other account). Thus, the IRR should be compared to any alternate costs of capital including an appropriate rick premium.

The investment also brings potential tax consequences if successful and again, appropriate professional advice should be sought before matters proceed.

If you're up for the opportunity - happy property hunting!

Publication: Dentistry Scotland
Author: Roy Hogg