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Property Investment

Transcript: SEMINAR 5 THANK YOU! Property Investment Introduction SEMINAR 5 Property Investment Learning Outcomes Learning Outcome Direct Indirect Different forms of Property investment Advantages and Disadvantages REITs Literature Review The Global Financial Crisis Performance Analysis Value added to mixed asset portfolio How Direct and Indirect should be used Performance of Indirect Overview Repercussions Performance of Direct Direct Indirect Forms of Property Investment Forms of Property Investment Direct Property Investment Real estate investments Purchase of the whole or part of an asset Residential, commercial, industrial or retail property Requires time management and is capital intensive DIRECT PROPERTY INVESTMENT Liquidity: Relatively illiquid Investment Horizon: Long-term in nature Gearing: Debt financing can be approx. 40% - 60% Asset Valuation: Frequent appraisal-based valuations Factors to consider: i) Amount to invest ii) Risk (Diversification) Features of Common Direct Property Investment Indirect Property Investment Indirect Property Investment Involves investing in a product that invests in property Performance is based largely on some measure of property performance Suitable for investors who: Are willing to commit to a long-term investment Aim to invest in property markets without having to actually buy or invest directly in property Who understands that the property market can be very volatile Types of indirect property investment:  Purchasing shares in a property company  Property funds  Property investment trusts  Property loan stock companies (PLS)  Property unit trusts (PUT)  REIT A REIT is a company or fund that owns or finances real estate Real Estate Investment Trust (REIT) Company: SA REIT Fund: Investec Property Fund Equity REIT Mortgage REIT Hybrid REIT REITs in South Africa Introduced to South Africa in 2013 Previously only PLS and PUT Problems with PLS and PUT: Not recognized as property investment vehicles internationally Different legal forms Different regulatory frameworks Tax inconsistencies REITs created a unified regulatory framework for both the PUT and PLS regimes This unified regulatory framework provided investors with tax certainty South African REITS are universally recognized PLS became known as a Company REIT PUT became known as a Trust REIT REITs in South Africa Top 100 Companies Survey (INet BFA, 2016) Fortress Income Fund B Resilient REIT Hyprop Investments SA Corporate Real Estate Dipula Income Fund B Octodec Investments Investec Property Fund Redefine Properties Oasis Crescent Property Fund Investing in REITs Anyone can invest, however it appeals to those investors who seek a continuous and stable income stream over a long period Investments can be done directly via a securities account (online or using a stockbroker) or through collective investment schemes that invest in REITs Requirements for being listed as an South African REIT: Hold minimum of R300 million worth of property Debt > 60% of gross asset value 75% of income received must come from rent, property owned or investments in property 75% of taxable income must be present to issue to investors Advantages and Disadvantages Advantages and Disadvantages Direct Property Investment Direct Property Investment Lucrative tax Receive secure income payments on a continuous basis Inflation hedge can be put into place to conserve the true worth of the asset Portfolios can be managed independently Advantages Advantages Large amounts of capital required by investors to gain diversified portfolios Risk is higher due to uncertainty Risk is entirely upon the owner of the investment Disadvantages Disadvantages Indirect Property Investment Indirect Property Investment Advantages Advantages Higher dividend Improved liquidity Portfolio diversification Low risk Tax implications Cyclical fluctuations Profit sharing Higher fees Disadvantages Disadvantages Literature Review Literature Review The Value of Direct and Indirect Property Investment in a Mixed-Asset Portfolio The Value of Direct and Indirect Proper... Conducted on direct and indirect property investment in UK, US, Germany and Netherlands. Correlation between direct and indirect Indirect investment offers better diversification against bonds and equities Portfolios with include indirect property investments earns similar returns to direct property investment market. Baum (2006) Baum (2006) Conducted on Malaysian property investment Weighted REITs portfolio does provide diversification benefits Important in deciding role of direct and indirect property investment in South Africa Emerging Malaysian real estate market at the time was similar to current emerging South African market Lee and Hwa (2008) Lee and Hwa (2008) Conducted in USA Period ranging from 5-20 years Performance of REITs in short run and long run Diversification benefits from REITs increase as time horizon increases Increased returns and reduced risks for mixed asset portfolio Lee and Stevenson (2005) Lee

PROPERTY INVESTMENT

Transcript: Otherwise if the industries closed the population would decrease and the renting request would go down (Figure 5). By law, we have to pay the various taxes: IMU (Imposta Municipale Unica) is a tax applied to the real estate component of the assets. We pay € 1,602.72 per month, €19,232.64 per year. Totally we have to pay €192.326.4. TASI (Tributo per i Servizi Indivisibili) is a tax for city services like the lighting and the stradal maintenance. In Florence, TASI costs €346. The tenant pays only 10%, so €34, and we pay €311.4 per year. TARI (tassa sui rifiuti) is the tax related to waste management in Italy. In Florence, TARI costs € 244 a year so € 2,440 in ten years. So we still have €334.838.52. For condominium expenses we have to pay €12.000, then €192.326.4 of IMU and finally €5.554 of TARI and TASI. The total amount of money remaining €124.958.12. For the last 18 months we haven't rented the apartment to prepare it for our son. In two years, the value of real estates in Florence has increased by 3.52% and is constantly growing (Figure 1). We bought this apartment in January 2018 and we spent €275,000. Furthermore it's left over advanced €225,000. We decided to rent the property to be able to pay the various taxes. In January 2018 the average rented price is €14.82 per m2 (Figure 2), so we rented the apartment for €1,100 a month, relying on the "Immobiliare.it" agency. As required by the contract, we paid a month's salary to the agency. After six months a couple asked to rent, with a contract (2018 - 2026), €1,100 per month. Figure 2. The prices of rented houses in Florence Positive & Negative Scenarios For the future there are positive and negative scenarios. For example if in the town was the olimpics game, the prices would go up and this is a positive scenario (Figure 4). Figure 1. The prices of houses in Florence Giorgia Bianco & Jacopo Sulis To sell an apartment or a house a person can trust in an agency or to sell it indipendently (for example with a online announcement). If somebody trusts in an agency he must pay him, but the agency would do more publicity and it's more safe. How much did we earn? We have €500,000 to buy a house for our 12-year-old son, when he graduates, in about 10 years. What we decided to do? We have decided to buy a flat in Florence now. It's located near Piazza Batoni, twenty minutes far from the old town of Florence. The apartment is located on the fourth floor and consists of 4 rooms, with a bathroom, a balcony and a spacious terrace, for a total of 75 m2. Introduction Figure 5. Negative trend Figure 3. The inflation in Florence (ISTAT) Taxes The End! PROPERTY INVESTMENT During the years some risks can happen: a piece of forniture can break the wall's plaster can ruin itself earthquakes or any type of environmental disaster To solve these risks is drown up an insurance for theft, flooding, electrical breakdown, fire and environmental disasters. It costs €300 per year, so totally we have to pay €3,000. Some obstacles are, for example, if nobady wants to rent (for example because of the prices or because of the unenployment) or if the tenant damages the apartment. To avoid these obstacles we bought a hous in Florence, a increasing city, and we guarantee that the tenant was reliable. How can you sell a house? If we don't decide to invest that money the prices could increase, so it's better to buy a property now (Figure 6). Figure 4. Positive trend Risks & Obstacles 1,43 : 100 = x : 1100 (1100 * 1.43) : 100 = 11 * 1.43= €15.73 1100 + 15.73 = €1,115.73 For the second year the month's salary is €1,115.75, so we have earned, for the second year, €13,388.76. In 2020/2021 we've earned €13,580.16. In 2021/2022 we've earned €13,774.32 In 2022/2023 we've earned €13,971.24 In 2023/2024 we've earned €14,171.04 In 2024/2025 we've earned €14,373.72 In 2025/2026 we've earned €14,579.28. In these 8 years we have earned €109,838.52, which must be added to €225,000 (remained from the starter €500,000). So we still have €334,838.52. Figure 6. Florence house prices For the first year, they paid us €13,200, but we had to pay a month's salary to the agency, so we've earned €12,100. On average, according to ISTAT data, every years inflation is around +1.43% (Figure 3).

Property investment

Transcript: Costs Sambe Investments Pty Ltd ABN 67 078 995 856 / AFS Licence 478766 trading as Capitalwise Financial Services ('Capitalwise’). We have not taken your personal circumstances into account when preparing the information in our electronic publications so they may not be applicable to your circumstances. You should therefore consider your circumstances and consult with a licenced financial adviser before making any investment decision. Past performance is not an indication of future performance. Our electronic publications are prepared in good faith and we accept no liability for any errors or omissions. Not all articles are prepared by Capitalwise so they may not represent our views and opinions. Capitalwise is in no way responsible for the content or loss resulting from use of any website owned by a third party that may be linked to this presentation and/or email via hyperlink. Where to buy Pros and cons of property investment Investing in overseas property is more risky than investing in property in Australia. It is much more difficult to make sure the investment suits your needs if you don't have local knowledge and you can't regularly inspect the property. ASIC has received complaints about promoters who are encouraging Australians to invest in the United States property market. If you've been 'invited' to invest in a supposedly 'cheap' overseas property, ask yourself why they need someone in Australia to invest? Why aren't savvy locals investing? Chances are it's a dud investment. Here are some things to consider if you're thinking about investing in property overseas: Distance - Good tenants and good property managers are hard to find, especially when you're so far away from the property. Renovations and repairs - Expensive renovations and repairs may be needed, especially if the property is in a location prone to squatters and vandalism. Buying property sight unseen is also a big risk. Hidden costs - You must factor in Australian tax laws, local property taxes, insurance, management costs, and ongoing repairs. There are lots of hidden costs that the promoter may not tell you about. Exchange rate - Changes in the exchange rate could affect the amount of income you receive The pitfalls Cost - Rental income may not cover your mortgage payments or other expenses so you may have to use other money to cover these costs. Interest rates - An increase in interest rates will increase your repayments and decrease your disposable income. Vacancy - There may be periods of time where you don't have a tenant and will have to cover all costs yourself. Inflexible - You can't sell off a bedroom if you need to access some cash in a hurry. Lack of diversification - If property investment is your main investment you may have little or no diversification. Loss of value - If the value of the property goes down you could end up owing more than the property is worth, this is known as negative equity. High entry and exit costs - Expenses such as stamp duty, legal fees and real estate agent's fees make buying and selling property very expensive. Property investment Disclaimer Investing in property may be a good way to grow your assets, however, as with other types of investments, it's important to do your research and seek professional advice if you're unsure about any aspect of the investment. Managing an investment property Don't invest only in property If you invest exclusively in property, you will have a lot of money riding on one market. If you also own your home, you will have all of your wealth concentrated in the property market. This is poor diversification and increases your risk. Investments such as managed funds and ETFs allow you to invest in a broader range of assets, which will reduce your overall risk. Work out your income and expenses What to buy Risks with overseas property investing Investment property advisers Property prices can fluctuate Buying a property to rent out is a popular form of investment. Houses and units are easier to understand than many other types of investments, yet they do have some issues you need to be aware of. The benefits Less volatility - Property can be less volatile than shares or other investments. Income - You can earn rental income if it's tenanted. Capital growth - If your property increases in value over time you will benefit from a capital gain when you sell. Tax deductions - Most property expenses can be offset against rental income, for tax purposes, including interest on any loan used to purchase the property. Physical asset - You are investing in something you can see and touch. Where and what you buy will affect your return on investment. The following tips will help you develop your own criteria for a good property investment. You can manage your property yourself or you can engage a managing agent to do it for you. If you manage the property, you will avoid paying management costs but you will have to do everything, from showing the property to tenants to collecting

INVESTMENT PROPERTY

Transcript: An Investment property is land or a building or part of a building or both held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both Not Intended for : (a) Use in the production or supply of goods or services or for administrative purposes; or (b) Sale in the ordinary course of business. Property held under an operating lease INVESTMENT PROPERTY Illustration DEFINITION (IAS 40) WITH RENTAL INCOME WITH RENTAL INCOME If the entity provides ancillary services to the occupants of a property held by the entity, the appropriateness of classification as investment property is determined by the significance of the services provided. THE END Transfers of Investment Property Measurement of Transfers Owner-Occupied Ancillary services NOT INVESTMENT PROPERTY Renzel P. Robles Vincent Paul S. Santos PPE Solution Intracompany rentals Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned level of occupancy. Inability to determine fair value reliably Subsequent measurement If inventory to investment property to be carried at FV, remeasurement shall be included in P/L Investment property under construction is completed and to be carried at FV, difference in FV and CA to be included in P/L The entity shall measure such investment property using the cost method until disposal thereof The residual value of investment property shall be assumed zero. The entity can continue the use of fair value method in its other investment property Illustration OWNER-OCCUPIED If the owner uses part of the property for its own use, and part to earn rentals or for capital appreciation, and the portions can be sold or leased out separately, they are accounted for separately. If the portions apportioned, the property is investment property only if the owner-occupied portion is insignificant. INITIAL RECOGNITION Solution PPE FV,12/31/13 FV,12/31/14 Gain(loss) Property 1 3,200,000 3,500,000 300,000 Property 2 3,050,000 2,850,000 (200,000) Net gain from change in FV 100,000 Land held for long-term capital appreciation Land held for a currently undetermined future use. Building owned by the entity and leased out under one or more operating leases. Building that is vacant but is held to be leased out under one or more operating leases. Property that is being constructed or developed for future use as investment property. Transfers occur when there is a change of use that is evidenced by: Commencement of owner occupation- investment property to owner occupied property Commencement of development with a view to sale – transfer from investment property to inventory End of owner occupation – transfer from owner-occupied property to investment property INVESTMENT PROPERTY ACCREV Chapter 8 Investment property should be recognised as an asset when: it is probable that the future economic benefits that are associated with the property will flow to the entity the cost of the property can be reliably measured. Under the Fair value model: FV – December 31, 2013 P5,900,000 FV – December 31, 2014 P6,000,000 (100,000) Under the cost model: Depreciation expense for 2014 (P5,800,000/40) 145,000 PROPERTY WITH DUAL PURPOSE EXAMPLES OF INVESTMENT PROPERTY . K co. owned a single investment property which had an original cost of P5,800,000 on January 1, 2011. On December 31, 2013, the fair value was P6,000,000 and on December 31, 2014, the fair value was P5,900,000. On acquisition, the property had useful life of 40 years. What is the expense to be recognized in profit or loss for the year ended December 31, 2014 under the fair value model and cost model? A property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property provided that: the rest of the definition of investment property is met the operating lease is accounted for as if it were a finance lease the lessee uses the fair value model set out in this Standard for the asset recognised With Rental Income OWNER OCCUPIED . Property intended for sale in the ordinary course of business or in the process of construction or development for such sale Property being constructed or developed on behalf of third parties Owner-occupied property including property held for future use as owner-occupied property property held for future development and subsequent use as owner-occupied property property occupied by employees owner-occupied property awaiting disposal. Property that is leased to another entity under a finance lease. An entity can choose either the cost model or the fair value model Fair value model Carried at fair value. Changes are included in the net income or loss for the period as shown in the income statement Cost model Cost less any accumulated depreciation and any accumulated impairment losses. Fair value of investment

INVESTMENT PROPERTY

Transcript: On 1 January 2016 When the Recognition Criteria of Investment Property met? The building is classified as Invesment Property The building meets the definition of Investment Property (IP) Lolly Bhd. operate the supermarket business with useful life of the building is 20 years Scenario Investment Property As the property market is more stable than the other market, investment property generates fixed returns to the investors. The income is more certain because we receive constant rental payment from the tenants. Purchase the property in a good location. 31/12/2015 Monthly rental payment = RM50 000 x 12months = RM600 000 PPE Carrying amount = RM4 750 000 - (RM4 750 000 / 20) = RM4 512 500 Other income: Ancillary services 35,000 Rental income 600,000 Expenses: Depreciation of Investment Property 300,000 GROUP MEMBERS: On 1 January 2015, Lolly Bhd. bought a building costing RM5 000 000 to operate its new supermarket business line. A trade discount of the 6% of the purchase price was received. Registration fee of RM50 000 was incurred is connection of the property. The building has an estimated useful life of 20 years. The fair value of the building on 1 January 2016 and 1 January 2017 was determined to be RM4 370 000 and RM5 400 000 respectively. However, on 1 January 2017, Lolly Bhd. had moved to the new place. The building that used for supermarket was rented out to Daisy Bhd. Daisy Bhd. paid the monthly payment of RM50 000 to Lolly Bhd. Lolly Bhd. provides an ancillary service to Daisy Bhd. at cost of RM35 000 annually. So, Lolly Bhd. adopts the cost model in measuring its Investment Property. De-Recognition of the Investment Property Treated in SOPL MFRS 116 - MFRS140 Measurement after Recognition PPE Element of the Building Statement of Financial Position as at 31 December 2017 (Extract) IP - The cost model is adopted to measure the investment property. - MFRS 140 para 56 CA= cost - Acc.depreciation ( RM 5 400 000 - RM 300 000 = RM 5 100 000) INVESTMENT PROPERTY Property held to earn rental through rented it out to Daisy Bhd Ancillary service = RM35 000 Recognised as revenue and capitalised and credited to SOPL 31/12/2017 Measurement after Recognition of Investment Property Fair value on 1 January 2017 = RM5 400 000 Carrying amount = RM4 370 000 - (RM4 370 000 / 19y) = RM4 140 000 1 January 2017 The building is treated as Investment Property (MFRS 140) since it met the definition: An owned investment property shall be recognised as an a asset when, and only when: a) it is probable that the future economic benefits that are associated wit the investment property will flow to the entity and b) the cost of the investment property can be measured reliably. PRESENTATION AND DISCLOSURE Measurement at Recognition trade discount compare RM5 000 000 x 6% = RM300 000 RM5 000 000 - RM300 000 = RM4 700 000 CA - FV = RM5 400 000 - RM4 140 000 = RM1 260 000 (surplus) On 1 January 2017, the investment property will be measured at the fair value of the PPE from previous year. = CA - FV = RM4 512 000 - RM4 370 000 = RM142 500 (deficit) C lassification of the Building AFIQ HAIKAL BIN ZAHAR HISHAM (2019572591) FARAH SOFEA BINTI ISMAIL (2019563741) IZZATI SYAZWANI BT BAHARUDIN (2019527715) FARRA NUR HIDAYAH BT JAFFRI (2019348583) EMIRA NURSHAHIRA BT NORZANI (2019359327) written off to SOPL Statement of Profit and Loss (Extract) For The Year Ended 31 December 2017 Carrying amount = RM4 512 000 Fair value on 1 January 2016 = RM4 370 000 RM Non Current Assets: Investment property 5, 100 000 Current Assets: Bank 635 000 Owner Equity: Asset Revaluation Reserves 1, 117 500 Transfer from PPE to IP Objective of Investment Property Purchased price = RM5 000 000 Trade discount = 6% Registration fee = RM50 000 initial cost = RM4 700 000 + RM50 000 = RM4 750 000 Also will be capitalised in SOPL as a revenue

Investment Property

Transcript: Definition of Investment Property Dual use Property Lessor who Provides Ancillary Services Initial Measurement Subsequent Measurement Subsequent Expenditures Transfers References IFRS “Investment property” is property (land or building) held to earn rentals or for capital appreciation, or both. US GAAP Unlike IFRS,there is no specific definition of ‘investment property’; such property is accounted for as property, plant and equipment unless it meets the criteria to be classified as held-for-sale. IFRS A portion of a dual use property is classified as investment property only if the portion could be sold or leased out under a finance lease. Otherwise the entire property is classified as property, plant and equipment, unless the portion of the property used for own use is insignificant. US GAAP Unlike IFRS, there is no guidance on how to classify dual use property. Instead, the entire property is accounted for as property, plant and equipment. IFRS When a lessor provides ancillary services, the property is classified as investment property if such services are a relatively insignificant component of the arrangement as a whole. US GAAP Unlike IFRS, ancillary services provided by a lessor do not affect the treatment of a property as property, plant and equipment. IFRS An investment property is measured initially at its cost. Transaction costs are included in the initial measurement. US GAAP Like IFRS, investment property is initially recognized at cost. IFRS Subsequent to initial recognition, all investment property is measured under either the fair value model (subject to limited exceptions) or the cost model. When the fair value model is chosen, changes in fair value are recognized in profit or loss. US GAAP Unlike IFRS, subsequent to initial recognition all investment property is measured using the cost model. IFRS Disclosure of the fair value of all investment property is required, regardless of the measurement model used. US GAAP Unlike IFRS, there is no requirement to disclose the fair value of investment property. IFRS Subsequent expenditure is capitalized only when it is probable that it will give rise to future economic benefits. US GAAP Like IFRS, subsequent expenditure is capitalized only when it is probable that it will give rise to future economic benefits. Investment Property REFERENCES Lessor who Provides Ancillary Services http://www.grantthornton.com.au/files/gt_2013_comparison_us_ifrs.pdf http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml https://wiki.ifrs.com/Investment-Property http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2013.pdf http://www.ey.com/Publication/vwLUAssets/US_GAAP_versus_IFRS:_The_basics_November_2012/$FILE/US_GAAP_v_IFRS_The_Basics_Nov2012.pdf http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/IFRS-compared-to-US-GAAP-An-overview-O-201311.pdf Dual Use Property Contents Transfers Subsequent Measurement Differences and Similarities Between IFRS & US-GAAP Definition of Investment Property Rukiye Dönmez EFA Initial Measurement Subsequent Expenditures IFRS Transfers to or from investment property can be made only when there has been a change in the use of the property. US GAAP Unlike IFRS, investment property is accounted for as property, plant and equipment, and there are no transfers to or from an “investment property” category. Subsequent Measurement

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