Actuarial Investments

1
Actuarial Investments

• Shane Whelan
• L551

2
Description of Key Markets

• - The Property Market
• II of III

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Industrial Property

• Smallest in unit value, not flexible in use.
• Rents linked to strength of manufacturing for
  small and medium sized companies that use
  industrial units.
• Prime here is well-placed for transport and close
  to a suitable supply of labour.
• High rental yield because
• supply responds fast as cheap and quick to build.
• They become obsolete more quickly.
• Fabric of builing deteriorates.
• Site value low.
• Cyclical industry recession, possible void that
  is hard to fill as bad time and property not
  suitable to many tenants.

4
Industrial Property

• Scope for rental growth?
• Few comparables.
• Depreciation high

5
Sundry Property Types

• Warehouses similar to factories but labour
  supply not important but transport is crucial.
• Shopping centres
• Big
• Limited marketability
• Concentrated risk.
• Agricultural forestry
• Dependent on Government policies.
• Residential
• High management costs
• Poor image of landlords (and institutions)
• Poor quality tenants, tax disadvantage, political
  interference

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Freehold Leasehold Investments

• Freeholder the ultimate owner in perpetuity.
  His rights on property are limited by
• Terms of unexpired lease
• Easements
• Covenants
• Building regulations
• Statutory requirements on usage, etc.
• If no lease on property then freehold is said to
  be unencumbered. Otherwise it is said to be
  leased.
• Leaseholder rights over property limited by all
  limitations on the freehold plus those extra ones
  imposed in the lease e.g., type of use, hours
  of usage, maintain in good condition, etc.

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Freehold Leasehold Investments

• On reversion to the freeholder after a long lease
  the property can (v. unusually) have a negative
  value so put it in head lease that it must be
  in reasonable condition at the expiry of lease.
• Freeholder is unique but there can be multiple
  leaseholders ground lease, head lease,
  sub-leases.
• Hence a holder of a sub-lease can have a highly
  geared income stream paying rent on the lease
  and receiving rent from the tenant she leases to.
  The difference between the former and the latter
  is called profit rent.
• As term of lease , and rent is low
  (relative to rack rent) and fixed then leasehold
  interest approximates an unencumbered freehold.

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Freehold Leasehold Investments

• Leaseholds are like a geared annuity-certain, and
  their value depends on the term an likely profit
  rent.
• Leaseholds are generally less marketable than
  freeholds.

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Major contents of a lease

• The parties to the agreement.
• The commencement
• The length of the lease.
• A clear description of the property, with any
  easements.
• The amount of rent to be paid and its frequency
  e.g., monthly, quarterly, annually.
• Rent review period and how to settle a dispute.
• The use to which the property can be put, who is
  responsible for repairs, insurances, and other
  expenses.
• Break clauses may be included tenant may
  relinquish lease after a given period of years.
  This gives a form of periodic lease or
  automatically renewable lease (or tenancy).
• Other covenants restricting its use.

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Finance for Property Investment Development

• Institution maybuy the freehold or leasehold
  interest in property and then let to tenants.
  However there are other methods
• Mortgages make long-term fixed rate mortgages
  available to commercial property investors.
• A fixed interest investment, yielding above gilt
  of similar duration.
• In 1871 over half the assets of life offices were
  in mortgages, falling to 10 in 1905 where it
  remained until the 1970s.
• Sale Leaseback the owner (and occupier) sells
  the property to an institutional investor and
  leases it back. Usually the sale price and rent
  is under going market rate.
• Development finance co-develop a property with
  a property developer, taking an equity interest
  so that the profits are split.

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Other (i.e., Indirect) Ways to Gain Exposure to
Property Market

• Property shares shares in property companies.
• Have substantial portfolio of properties with
  rental income which helps fund development costs.
  Their aim to be maximise NAV (net asset value).
  Subdivide such companies into
• Development
• Investment
• Trading
• Pooled property funds unit trusts.