The US housing market in charts: Case-Shiller and home permits

US home prices rose 0.7% in September and are up 13.3% over the same period last year, according to new data from the S&P Case-Shiller index. The index, which measures single-family home prices in twenty metro areas, showed the highest year-over-year gain since February 2006, Reuters reports.
Reuters breaks down the gains by metro area. Las Vegas leads the way with a remarkable 29% jump over last year:
Here’s Case-Shiller’s longer-term view of US housing prices, charting the index back to 1988:

Also this morning, new data from the Commerce Department showed October US housing permits rose 6.2% above September’s level, and 13.9% year-over-year.
Calculated Risk’s Bill McBride looks at total and single unit permits since 1960 and sees a “huge collapse following the housing bubble”, followed by a general increase “after moving sideways for about two years and a half years”. Here’s his chart:

IS THE FED TAPERING TO EFFECT US HOUSING MARKET

Some economists said the housing data, combined with stronger-than-expected October nonfarm payrolls and retail sales reports, raised the risk the Fed could scale back its massive monthly bond purchases as early as December.

"The jump in building permits means that another obstacle to tapering is now removed," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

"The weakness in housing starts and new home sales were probably one important reason - besides the slowdown in payroll gains - why the Fed did not taper in September."

The U.S. central bank noted at last month's meeting that the recovery in the housing sector had slowed somewhat in recent months. Fed policymakers next meet on December 17-18.

The strong march in house prices, rising stock market prices and improvements in job gains are not helping to lift household spirits, which could be a challenge for retailers during the holiday shopping season.

In a third report, the Conference Board said its index of consumer attitudes fell to 70.4 this month from 72.4 in October. Consumers' labor market assessment was little changed.

But while building permits are not counted in gross domestic product (GDP), they are a key indicator of economic activity and the sturdy gains in both September and October should ease concerns the housing market recovery was stalling.

"The building permits reports suggest some upside risks to GDP growth in the coming quarters from construction activity," said Millan Mulraine, senior economist at TD Securities in New York.

Though higher mortgage rates have slowed the pace of home sales, demand for accommodation as household formation continues to recover from multi-decade lows is expected to keep supporting residential construction.

Permits for the multifamily home sector surged 15.3 percent in October and approvals for buildings with five units or more reached their highest level since June 2008. Single-family home permits, the largest segment of the market, rose 0.8 percent.

The Commerce Department postponed the release of figures on housing starts and completions for September and October until December 18 because the collection of data was affected by the 16-day shutdown of the government last month.

November data also will be published at that time. The partial shutdown of the federal government also delayed the publishing of the September and October permits reports.

US CONTINUES TO SHOW GROWTH WITHIN HOUSING SECTOR

WASHINGTON (Reuters) - Permits for future U.S. home construction hit a near 5-1/2 year-high in October and prices for single-family homes notched big gains in September, suggesting a run-up in mortgage interest rates has not derailed the housing recovery.

The data releases on Tuesday were the latest signs of strength in the economy, despite headwinds from rising mortgage rates and last month's partial government shutdown.

"The reports reinforce the notion that the housing sector is successfully digesting the summer mortgage rate pop," said Mike Englund, chief economist at Action Economics in Boulder, Colorado.

Building permits jumped 6.2 percent last month to an annual rate of 1.03 million units, the highest since June 2008, the Commerce Department said. It was only the second time since mid-2008 that permits breached the 1 million-unit mark.

Last month's increase beat economists' expectations for a 930,000-unit rate. Permits, which lead housing starts by at least a month, rose 5.2 percent in September and were up 13.9 percent from a year ago in October.

A separate report showed the S&P/Case Shiller composite index of home prices in 20 metropolitan areas jumped 13.3 percent in September from a year ago, the strongest gain since February 2006.

Stocks on Wall Street were little changed in thin pre-holiday trade, while prices for U.S. Treasuries rose. The dollar was weaker against a basket of currencies.

House prices have largely been driven by a supply squeeze as a glut of foreclosed properties clears. But the combination of rising prices and mortgage rates means some potential buyers are being pushed out of the market.

This will dampen demand and is expected to gradually slow the pace of house price increases in coming months.

"While demand for housing remains as strong as ever, credit is tight, flood insurance rates are on the rise, mortgage rates are elevated and income growth has not kept pace with price growth," said Stephanie Karol, a U.S. economist at IHS Global Insight in Lexington, Massachusetts.

A Reuters survey published on Tuesday forecast home prices rising 6.5 percent next year, roughly half the pace expected in 2013.

Interest rates have risen sharply since May as markets anticipated the Federal Reserve would start cutting back on its monthly bond purchases this year, with the 30-year fixed mortgage rate surging nearly a full percentage point.

It hit 4.49 percent in September, the highest since July 2011, according to mortgage lender Freddie Mac. But rates have been retreating as expectations of a Fed taper are pushed to early next year, averaging 4.19 percent last month.

The benefits of investing in commercial property versus Residential property

Commercial vs Residential Most people think of residential property when they’re thinking about investing, but commercial property has its rewards too. The benefits of investing in commercial property Leases tend to be much longer – anything from three to 20 years - and they are quite often secured by bank guarantees, which make them a secure investment. Rent is reviewed annually and is usually increased either by the CPI or by 4%, whichever is the greater. Commercial tenants will also tend to maintain the property better as the look and condition of the property is important to their business and their staff. But commercial leases also have added protection for the owner in the form of make good clauses, maintenance clauses and management clauses. The return on invested capital on commercial properties ranges between 7% and 10% net after all costs.  Residential property investors must pay all outgoings and other costs, although of course this can be negatively geared. Deductible rates on commercial property, though, are higher than for residential because of higher depreciation rates. The benefits of investing in residential property You need a smaller deposit, which can be important in particular if this is your first investment property. Depending on your credit history and income, you can even borrow 100% of the purchase price. Commercial mortgages require a deposit of at least 30%. Rates on residential mortgages also tend to be lower. Lenders are much stricter on borrowing criteria for commercial properties and if the property is not let at the time you purchase it, you may have to pay GST. The commercial property market can be less predictable than the residential market (where historically properties tend to double in value every 7 to 10 years). There are also different kinds of commercial property to consider such as commercial, industrial and retail. With proper research, you may find that you are more comfortable making the decision about which type of property to invest in. Although residential leases are shorter than commercial ones, residential properties are generally easier to let, meaning you will have less time when the property is vacant. It can take months to find a new commercial tenant. Whether you choose residential or commercial property, the more you know about your market, the safer your investment will be.

What are the differences in investing in commercial and residential property

The first difference is that commercial property tends to cost many times the price of residential property. Although it is possible to buy small, individual shops and offices at prices that are comparable with those of residential properties, the cost of large, high-quality commercial properties, such as shopping centres, office blocks or large industrial premises, may run into hundreds of millions of pounds. As such, for most personal investors, collective investment schemes represent the only way to gain exposure to commercial property.
Secondly, the uniqueness of most commercial properties outside of high street shops or industrial warehouses makes it difficult for investors to get an accurate valuation without access to professional advice. By contrast, it's relatively easy for residential investors to compare the prices of houses or flats in a given area, based on comparable market activity. Professional, technical advice is crucial for anyone considering direct investment in commercial property.
Thirdly, the lease between landlord and tenant varies significantly between the commercial and the residential markets, particularly given the following:

• Commercial leases tend to last much longer than residential leases - five years or more versus an average of one year (although residential leases tend to be more readily renewable). However, residential property can often entail a higher level of voids than commercial property because of the shorter lease period.
• Commercial property leases have traditionally contained clauses dictating that rent reviews are 'upward only', meaning a property's rent can't be less after review than it was before review.
• The legislation surrounding landlord and tenant relationships is different for commercial and residential leases.
• The responsibilities for repairs and maintenance are different; in commercial properties tenants are typically responsible for these costs, while in residential properties landlords are typically responsible. For landlords of residential properties, these costs can absorb much of their rental income - perhaps more than 30% in some cases.

Residential property is also likely to require more management time (and/or cost) than commercial property. This is because of smaller unit sizes, shorter lease lengths, and a greater obligation for maintenance and repairs.
Finally, the make up of income is different for commercial and residential properties. For commercial landlords, the income from rent is a much greater factor than for residential landlords. In fact, over the period 2002-2007 the average rental income from commercial property investment (expressed as a yield) was about 50% greater than from residential property. For residential landlords - both institutional and retail - there is a need to regularly sell a proportion of their properties in order to realise the increase in capital values to supplement the income from rental.

Self storage UK industry to remain effective and efficient for the clients

Self storage UK

Public storage market is a giant market having abundant cash flow, occupancy and rents offering stable and secure returns. A number of new companies are getting into the business of self storage facilities as it is potentially growing market offering bigger returns and greater rewards.
As the UK economy rebounded and came out of recession, the demand for investment in commercial real estate grew and peak earnings were reported by the self storage facilities owners in UK.
As the mortgage rates is picking up people are selling their homes and moving into small apartments where they require proper dwelling space and additional storage to keep items that they cannot store in a small house.
There are people who are searching for new jobs and are moving into new jobs. They are shifting from one city to another for jobs. During transfer from one place to other people seek public storage options. They need space where they can keep their belongings safely. There are numerous risks in this business. There is a slowdown in construction sector and this can lead to oversupply of self storage facilities leading to saturation in the market.

Safety issues in Self storage UK industry

Self storage UK industry is expected to remain strong and continue growing in the coming years. The managers of self storage should be aware of the latest trends to ensure the customers get the right services in self storage units. Safety is one of the major features that are required in a storage unit.
The customers should be given proper services to be able to operate the unit or room allocated to them safely and even lockers can be provided to the users to allow them to store their valuables. Trust should be built between the store manager and the customers and the money charged for such units should be based on the service.
These days the self storage units hire staff and conduct a background check of their new staffs to ensure the employees working at the units are appropriate for their jobs. The security checks of the employee involve a series of steps of investigations and evaluation of the candidate through different methods. Many store owners spend a huge amount of money in searching for the right manager of the unit and once the manager is found you can train him or her to evaluate his performance and trust him to operate the unit.
As the time passes the manager of the store becomes confident and relationships develop between the manager and the employees. Once the storage owners knows the family background of the employee , the level of trust improves leading to better service and added responsibilities on the shoulders of the employee. This also increases confidence of the manager and employee.
Sometimes, when a relationship based on trust is built , minor actions of the employee or the manager can be predicted and as you go deep into it , you can identify if any of the employee is hiding something from you or not. There can be conditions when a person working with the store at one time does something wrong. The storage owners should be aware of the various difficulties that is faced by customers in renting a room. Security is one of the major aspects on which the self storage rents are determined.
Security aspects of stores should be upgraded from time to time. The manager of the store can be changed and other employees working in the store can also be given the responsibility to handle security. Special security cameras and equipments can be provided to prevent any kind of inconvenience.

Deloitte Real Estate publishes the Self Storage Association UK Annual Survey

 

The self storage industry remains resilient despite VAT increase

The self storage industry remains resilient despite the addition of the 20 per cent VAT charge on storage costs introduced in October 2012.

According to the latest Self Storage Association UK survey, produced by Deloitte Real Estate, a proportion of self storage firms opted to shield their customers from the full 20 per cent increase in rental costs by phasing in the increases over the year.  As a result there was only a five per cent fall in the achieved average net rents for UK self storage operators in 2012.

The survey shows national occupancy levels remain steady with average occupancy having dipped just two per cent to 68 per cent over 12 months and the average length of stay increasing to 41 weeks. Operators are reporting that they continue to concentrate on building up occupancy within their existing facilities in preference to developing or extending new schemes.

Rodney Walker, CEO of the Self Storage Association UK, commented:

“The VAT rise affected most of our operators and made self storage a more expensive product for the customer.  However, our members are confident that sales and profits can be maintained with 79 per cent of surveyed firms expecting profits to be the same or improve this year. The effect of the VAT increase has yet to be fully measured, but with average occupancy only falling two per cent over the year, members are confident of reversing this over the coming year.”

There is a growing trend for business customers taking space with 42 per cent of occupied space now coming from businesses (up from 36 per cent since 2010). Businesses tend to take larger amounts of space and rent for longer periods than private customers.  However, a recent report by The Royal Institute of British Architects (RIBA) has highlighted the shrinking average size of newly-built houses in the UK, with the majority of people surveyed moving into new homes reporting insufficient storage space for all their possessions.

Walker continued: “Few firms are contemplating opening new stores in the short term, and this will allow the industry to concentrate on attracting new customers to fill current space.  Most customers using self storage do so for the first time, so there is still huge potential to be tapped into.”

Ollie Saunders, partner and head of self storage at Deloitte Real Estate, said:

“The introduction of VAT has meant that domestic customers have seen some meaningful price increases, but it has not led to a significant impact on occupancy.  It has been an interesting test of the price elasticity of the product and goes to show that the industry has remarkable resilience to the economic downturn and is well placed to capitalise on future economic growth.  Investors and operators are telling us that optimism is returning and the sector is not oversupplied. It has a diverse customer base, and has demonstrated its robust ability to generate strong cash flows despite a significant fall in the number of housing transactions and a forced price increase.  That is a good place to be.

“We are also seeing a number of investment transactions – in the last few months Deloitte Real Estate has acted on the sale of three self storage facilities in two transactions at sub seven per cent yields, all beat expectations on price and saw competitive tension.  In the last 12 months there have also been two major transactions in Europe with institutions investing directly in portfolios, all allowing for a renewed depth to the market.”

The survey reports there are approximately 830 self storage facilities in the UK providing in the region of 30.1 million sq ft of storage space. Deloitte Real Estate estimates the total turnover for the UK industry in 2012 was £380m from around 400 different operators, employing over 2,000 fulltime equivalent staff. Of all the facilities in the UK, 330 are held by larger operators (40 per cent), with small operators accounting for the remainder.

Should i invest in self storage schemes

Is it a sound investment?

The self storage industry in the UK has shown exceptional resilience during the recent recession and tough economic climate.  The industry has continued to grow, prices have increased and many operators have also improved profits.  However the industry is not without risk and remains heavily influenced by local conditions. 
Potential self storage investors are advised to research the industry and the individual investment thoroughly, before investing.  This includes close analysis of the local market in which the investment property resides.  Incentive schemes such as rent guarantees should also be fully investigated to ensure that they reflect the true returns of the investment.  You should research both the financial proposition and also the management team responsible for managing the business and delivering the proposed outcomes. 
Investors should make themselves comfortable with all the risks and the local market conditions of supply and demand. These characteristics will impact vacancy levels and pricing in the market.  When considering the financial reports of a potential investment always ensure that proper consideration for operating expenses has been made. 
As with any significant investment you should seek independent financial advice on the nature of the market in relation to your investment.  There are a number of consultants who specialise in the industry and will provide advice based on a selected local market.

http://www.letsonsecuritiesltd.co.uk/#!commercial-property/cdfc

Self storage as an investment

There are now more than 400 companies operating self storage facilities in the United Kingdom. They vary from large multi-centre companies such as Storefirst, Safestore, Big Yellow, Access, Storage King, Lok’n Store, Shurgard, Alligator, Space Maker and Armadillo, who between them operate almost 300 facilities, to single-facility independent enterprises.
The latest membership survey shows that the industry in the UK now generates revenues of about £355m, has over 250,000 customers using the service and provides employment for over 2,000 people. The survey also reported that there are around 815 significant facilities in the UK and around 29.6m rentable square feet, averaging 0.5 square foot per head of population. The largest concentration of centres remains in London and the South East



The growth of the self storage industry in the UK over the last 10 years has seen the development of a number of methods for investors to become involved in the industry.  There are publically listed Self Storage companies, as well as property trusts associated with the industry. A number of Private Equity funds have also made direct investments into owning self storage assets, with management provided by partners or some of the established operators such as Storefirst, Safestore, Big Yellow, Lok’N Store & Storage King.   
In a number of these cases, investors have looked for background information and comfort in their decisions by looking at publicly available data, such as the presentations from the quoted Self Storage Companies and information provided by the SSA UK and in particular, its Annual Survey, completed in association with Deloitte Real Estate.

Advantages of the Alternative Investment Markets (AIM)

The Advantages
Increased Asset DiversificationInvesting IRA assets in these non-traditional investments allows for broader diversification, which helps to offset losses from other investments.

Independence from Market VolatilityUsually, the performance of traditional investments moves with the stock market. But this is typically not the case with non-traditional investments; therefore, they can help to balance the overall performance of the IRA.

Potential for Higher ReturnAs with other investments, the rate of return on alternative forms of investment is not guaranteed. However, many financial professionals project that the rate of return for these investments is usually higher than that for traditional investments.

ConclusionInvesting in these non-traditional asset classes can be tempting for the investor who wants to diversify his or her portfolio. However, as the list above demonstrates, other factors need to be considered. For instance, will the rate of return be enough to offset expenses incurred from UBI taxes and administrative fees charged by the financial institution? Will additional legal expenses apply? You should also remember that, as with other types of investments, the higher the potential return, the higher the risk. And with any form of investment, suitability and risk tolerance must be key determining factors. The investor must engage in serious, in-depth discussions with his or her financial advisor for assistance in making such decisions.

Understanding Alternative investments

Although the traditional combination of stocks, bonds and cash can provide most investors with satisfactory investment returns over time, an alternative class of investments exists for affluent and institutional investors. These alternative investments can provide an additional measure of diversification and tax benefits not available in traditional avenues. Consequently, financial planners who understand and offer this type of investment are in a much better position to land larger and more profitable clients and accounts.

What Are Alternative Investments?
This unique class of investments does not fall into a single larger class, such as debt or equities, but can be either one or the other. This investment class can satisfy many investment objectives such as speculation, avoiding taxes or reducing overall volatility. Alternative investments can include any of the following, as well as many other specialized investment vehicles generally tailored for high net-worth investors:

• Individual or managed derivatives
• Oil and gas ventures
• Hedge funds
• Tax shelters
• Commercial equipment-leasing programs

Navigating Restrictions And Regulations
Financial planners who are registered representatives (RRs) face somewhat different issues than those who are registered investment advisors (RIAs). RRs are limited to selecting alternative investments that their broker-dealers have approved, while RIAs have relatively few restrictions to contend with when choosing an alternative vehicle. RRs with clients who want an alternative investment, but don't have such investments approved by the broker-dealer, only have one course of action available. The representative must submit the investment to the broker-dealer's compliance department for approval, and hope that:

• The compliance department decides to approve the investment, and
• The entire process doesn't take so long that the RR loses the sale.

RRs are also subject to the rules set forth by their broker-dealers regarding alternative investments, such as what type of client the reps will allow to invest in these alternatives. Getting around these internal regulations can often be very difficult, and usually they must get permission from either the compliance department head, president or vice-president of the company to do so. Brokers who cannot get approval for an alternative-investment trade for a particular client are therefore generally powerless to effect the transaction.

Although RIAs do not have the same restrictions as RRs, they are bound as fiduciaries to select the best possible investment for their clients and must assume sole liability if their choice goes awry. But the only real logistical limitation that RIAs face when choosing alternative investments is whether the specific investment being used can be offered on a fee-based platform. If it cannot, the advisor must either become licensed to sell securities and become appointed with a broker-dealer that offers the security, or find a different investment alternative

Conclusion on Bonds

Now you understand the basics of bond investments. Here is a recap of what we discussed:

• Bonds are just like IOUs. Buying a bond means you are lending out your money.
• Bonds are also called fixed-income securities because the cash flow from them is fixed.
• Stocks are equity; bonds are debt.
• The key reason to purchase bonds is to diversify your portfolio.
• The issuers of bonds are governments and corporations.
• A bond is characterized by its face value, coupon rate, maturity and issuer.
• Yield is the rate of return you get on a bond.
• When price goes up, yield goes down, and vice versa.
• When interest rates rise, the price of bonds in the market falls, and vice versa.
• Bills, notes and bonds are all fixed-income securities classified by maturity.
• Government bonds are the safest bonds, followed by municipal bonds, and then corporate bonds.
• Bonds are not risk free. It's always possible for the borrower to default on the debt payments.
• High-risk/high-yield bonds are known as junk bonds.
• Bonds allow an investor to diversify their portfolio
• there is generally less risk in owning bonds than in owning stocks, but this comes at the cost of a lower return.  

Different Bond Types

Government Bonds
In general, fixed-income securities are classified according to the length of time before maturity. These are the three main categories:
Bills - debt securities maturing in less than one year.
Notes - debt securities maturing in one to 10 years.
Bonds - debt securities maturing in more than 10 years.

Marketable securities from the U.S. government - known collectively as Treasuries - follow this guideline and are issued as Treasury bonds, Treasury notes and Treasury bills (T-bills). Technically speaking, T-bills aren't bonds because of their short maturity. All debt issued by Uncle Sam (USA) is regarded as extremely safe, as is the debt of any stable country. The debt of many developing countries, however, does carry substantial risk. Like companies, countries can default on payments.

Municipal Bonds
Municipal bonds, known as "munis", are the next progression in terms of risk. Cities don't go bankrupt that often, but it can happen. The major advantage to munis is that the returns are free from federal tax. Furthermore, local governments will sometimes make their debt non-taxable for residents, thus making some municipal bonds completely tax free. Because of these tax savings, the yield on a muni is usually lower than that of a taxable bond. Depending on your personal situation, a muni can be a great investment on an after-tax basis.

Corporate Bonds
A company can issue bonds just as it can issue stock. Large corporations have a lot of flexibility as to how much debt they can issue: the limit is whatever the market will bear. Generally, a short-term corporate bond is less than five years; intermediate is five to 12 years, and long term is over 12 years.

Corporate bonds are characterized by higher yields because there is a higher risk of a company defaulting than a government. The upside is that they can also be the most rewarding fixed-income investments because of the risk the investor must take on. The company's credit quality is very important: the higher the quality, the lower the interest rate the investor receives.

Other variations on corporate bonds include convertible bonds, which the holder can convert into stock, and callable bonds, which allow the company to redeem an issue prior to maturity.

Next: See Conclusion on Bonds

Understanding and ascertaining the value of a Bond

Coupon (The Interest Rate)
The coupon is the amount the bondholder will receive as interest payments. It's called a "coupon" because sometimes there are physical coupons on the bond that you tear off and redeem for interest. However, this was more common in the past. Nowadays, records are more likely to be kept electronically.

As previously mentioned, most bonds pay interest every six months, but it's possible for them to pay monthly, quarterly or annually. The coupon is expressed as a percentage of the par value. If a bond pays a coupon of 10% and its par value is £1,000, then it'll pay £100 of interest a year. A rate that stays as a fixed percentage of the par value like this is a fixed-rate bond. Another possibility is an adjustable interest payment, known as a floating-rate bond. In this case the interest rate is tied to market rates through an index, such as the rate on Treasury bills.

You might think investors will pay more for a high coupon than for a low coupon. All things being equal, a lower coupon means that the price of the bond will fluctuate more.

Maturity
The maturity date is the date in the future on which the investor's principal will be repaid. Maturities can range from as little as one day to as long as 30 years (though terms of 100 years have been issued).

A bond that matures in 3-5 years is much more predictable and thus less risky than a bond that matures in 20 years. Therefore, in general, the longer the time to maturity, the higher the interest rate. Also, all things being equal, a longer term bond will fluctuate more than a shorter term bond.


Issuer
The issuer of a bond is a crucial factor to consider, as the issuer's stability is your main assurance of getting paid back. For example, the U.S. government is far more secure than any corporation. Its default risk (the chance of the debt not being paid back) is extremely small - so small that U.S. government securities are known as risk-free assets. The reason behind this is that a government will always be able to bring in future revenue through taxation. A company, on the other hand, must continue to make profits, which is far from guaranteed. This added risk means corporate bonds must offer a higher yield in order to entice investors - this is the risk/return tradeoff in action.

The bond rating system helps investors determine a company's credit risk. Think of a bond rating as the report card for a company's credit rating. Blue-chip firms, which are safer investments, have a high rating, while risky companies have a low rating

Next: See Different Bond Types

Bonds versus Stocks alias Debt versus Equity

Debt Versus Equity

Bonds are debt, whereas stocks are equity. This is the important distinction between the two securities. By purchasing equity (stock) an investor becomes an owner in a corporation. Ownership comes with voting rights and the right to share in any future profits. By purchasing debt (bonds) an investor becomes a creditor to the corporation (or government). The primary advantage of being a creditor is that you have a higher claim on assets than shareholders do: that is, in the case of bankruptcy, a bondholder will get paid before a shareholder. However, the bondholder does not share in the profits if a company does well - he or she is entitled only to the principal plus interest.

To sum up, there is generally less risk in owning bonds than in owning stocks, but this comes at the cost of a lower return.

Why Bother With Bonds?

It's an investing axiom that stocks return more than bonds. In the past, this has generally been true for time periods of at least 10 years or more. However, this doesn't mean you shouldn't invest in bonds. Bonds are appropriate any time you cannot tolerate the short-term volatility of the stock market. Take two situations where this may be true:

1) Retirement - The easiest example to think of is an individual living off a fixed income. A retiree simply cannot afford to lose his/her principal as income for it is required to pay the bills.

2) Shorter time horizons - Say a young executive is planning to go back for an MBA in three years. It's true that the stock market provides the opportunity for higher growth, which is why his/her retirement fund is mostly in stocks, but the executive cannot afford to take the chance of losing the money going towards his/her education. Because money is needed for a specific purpose in the relatively near future, fixed-income securities are likely the best investment.

These two examples are clear cut, and they don't represent all investors. Most personal financial advisors advocate maintaining a diversified portfolio and changing the weightings of asset classes throughout your life. For example, in your 20s and 30s a majority of wealth should be in equities. In your 40s and 50s the percentages shift out of stocks into bonds until retirement, when a majority of your investments should be in the form of fixed income.

Next: See Understanding and ascertaining the value of a Bond

Understanding Bonds

 What are Bonds?                                                                                              

The first thing that comes to most people's minds when they think of investing is the stock market. After all, stocks are exciting. The swings in the market are scrutinized in the newspapers and even covered by local evening newscasts. Stories of investors gaining great wealth in the stock market are common.

Bonds, on the other hand, don't have the same sex appeal. The lingo seems arcane and confusing to the average person. Plus, bonds are much more boring - especially during raging bull markets, when they seem to offer an insignificant return compared to stocks.

However, all it takes is a bear market to remind investors of the virtues of a bond's safety and stability. In fact, for many investors it makes sense to have at least part of their portfolio invested in bonds.

 

Have you ever borrowed money? Of course you have! Whether we hit our parents up for a few bucks to buy candy as children or asked the bank for a mortgage, most of us have borrowed money at some point in our lives.

Just as people need money, so do companies and governments. A company needs funds to expand into new markets, while governments need money for everything from infrastructure to social programs. The problem large organizations run into is that they typically need far more money than the average bank can provide. The solution is to raise money by issuing bonds (or other debt instruments) to a public market. Thousands of investors then each lend a portion of the capital needed. Really, a bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor).

Why would you loan money?

Of course, nobody would loan his or her hard-earned money for nothing. The issuer of a bond must pay the investor something extra for the privilege of using his or her money. This "extra" comes in the form of interest payments, which are made at a predetermined rate and schedule. The interest rate is often referred to as the coupon. The date on which the issuer has to repay the amount borrowed (known as face value) is called the maturity date. Bonds are known as fixed-income securities because you know the exact amount of cash you'll get back if you hold the security until maturity.

For example, say you buy a bond with a face value of £1,000, a coupon of 8%, and a maturity of 10 years. This means you'll receive a total of £80 (£1,000*8%) of interest per year for the next 10 years. Actually, because most bonds pay interest semi-annually, you'll receive two payments of £40 a year for 10 years. When the bond matures after a decade, you'll get your £1,000 back.

They are  many investment vehicles that offer opportunities that use the example that I have just given above. Each of these will vary in the return on the coupon and the maturity giving investors flexibility to choose what suits their needs.

Next: see Bonds versus Stocks alias Debt versus Equity

Introduction To Asset-Backed Securities (ABS)

ABS have evolved out of  mortgage backed securities (MBS) and are created from the pooling of non-mortgage assets. These are usually backed by credit card receivables, home equity loans, student loans and auto loans. The ABS market was developed in the 1980s and has become increasingly important to the U.S. debt market.

StructureThere are three parties involved in the structure of ABS and MBS: the seller, the issuer and the investor. Sellers are the companies that generate loans and sell them to issuers. They also take the responsibility of acting as the servicer, collecting principal and interest payments from borrowers. Issuers buy loans from sellers and pool them together to issue ABS or MBS to investors. They can be a third-party company or special-purpose vehicle (SPV). ABS and MBS benefit sellers because they can be removed from the balance sheet, allowing sellers to acquire additional funding. Investors of ABS and MBS are usually institutional investors and they use ABS and MBS to obtain higher yields than government bonds, as well as to provide a way to diversify their portfolios
Both ABS and MBS have prepayment risks, though these are especially pronounced for MBS. Prepayment risk is the risk of borrowers paying more than their required monthly payments, thereby reducing the interest of the loan. Prepayment risk can be determined by many factors, such as the current and issued mortgage rate difference, housing turnover and path of mortgage rate. If the current mortgage rate is lower than the rate when the mortgage was issued or housing turnover is high, it will lead to higher prepayment risk. The path of the mortgage rate might be difficult to understand, so we will explain with an example. A mortgage pool begins with a mortgage rate of 9%, then drops to 4%, rises to 10% and finally falls to 5%. Most homeowners would refinance their mortgages the first time the rates dropped, if they are aware of the information and are capable of doing so. Therefore, when the mortgage rate falls again, refinancing and prepayment would be much lower compared to the first time. Prepayment risk is an important concept to consider in ABS and MBS. Therefore, to deal with prepayment risk, they have tranching structures, which help by distributing prepayment risk among tranches. Investors can choose which tranche to invest based on their own preferences and risk tolerance.

Valuation It is important to measure the spread and pricing of bond securities and know which type of spread should be used for different types of ABS and MBS for investors. If the security doesn't have embedded options that are typically exercised, such as call, put or certain prepayment options, the zero-volatility spread (Z-spread) can be used to measure them. The Z-spread is the constant spread that makes the price of a security equal to the present value of its cash flow when added to each Treasury spot rate. For example, we can use the Z-spread to measure credit card ABS and auto loan ABS. Credit card ABS don't have any options, hence the Z-spread is appropriate.

The Bottom LineAsset-backed and mortgage-backed securities are complicated in terms of their structures, characteristics and valuations. Investors who want to invest in these securities can buy into property bonds such as the U.S Social Housing Bond. If you want to invest in ABS or MBS directly, makes sure you do a good deal of research, be confident of what you are doing and make sure your investment matches your risk tolerance.

Property is ripe for investment if we lose our aversion to risk

A couple of things reminded me this week that the biggest risk for an investor can sometimes – and counter-intuitively – be trying to keep out of trouble.

We are hard-wired to run from danger, which made sense when our principal concern was not getting eaten but is less helpful today when trying to make money in the markets.

The first reminder came in Warren Buffett’s annual letter to shareholders, in which he pointed to “hand-wringing” chief executives who have sat on their hands, refusing to invest in their businesses despite record levels of earnings and cash.

Not so Buffett, who invested more into the companies owned by his investment vehicle, Berkshire Hathaway, than ever before.

“Charlie [his business partner] and I love investing large sums in worthwhile projects, whatever the pundits are saying,” is how he puts it, justifying his decision, as only Buffett can, with the title of a song – “Every Storm Runs Out of Rain”.

Investing, the Sage of Omaha adds, is a game with the odds stacked in favour of success in the long run, which is why his preferred investment period is “forever”. His conclusion: “The risks of being out of the game are huge compared to the risks of being in it.”
The opportunity this has thrown up is in the secondary real estate market, which in the UK property business means pretty much everything outside the West End and City of London.
Real estate is not the only area in which investors have shied away from risk in recent years. The flight to safety in government bonds is the most obvious case in point.
But few have demonstrated such a spectacular preference for perceived safety in the past four years as property investors. Money has poured into prime central London assets while demand for almost everything else has been non-existent.
As a consequence, the gap between the yield on prime and secondary properties in the UK market, as tight as 1.2pc in 2007, had blown out to an unprecedented 5.8pc by the end of last year.
As in the bond market, yields in real estate rise when prices fall and the slump in investor demand for offices in places such as Birmingham and Manchester has seen the average yield on these secondary assets rise to an all-time high level of around 11.5pc.
So, while the yields available on perceived safe havens such as cash, government and some corporate bonds are lower than ever, the yield on secondary property is right at the top of its historic range. Quite simply, the asset class has never been cheaper.
Often in investment there is a good reason for suspiciously low prices and investments only look so compelling because you’re the only one who doesn’t know what’s really going on. At other times, however, the markets just get it wrong because they over-estimate the real risks.
This is what happened in 2008 in the bond market. As the chart shows, the yield on corporate bonds spiked when investors feared the global financial system might implode but quickly came back in when it became clear that Armageddon had been deferred.
The yield on secondary properties rose in line with bonds at that time but since then it has carried on widening to the extent that the available returns are out of kilter with economic reality.
Low interest rates have made this a very unusual downturn, one that many companies have been able to navigate largely unscathed, able to pay their rent and keep their landlords happy.
In fact, if you strip out obvious red flag areas, such as parts of the high street, the probability of insolvency in the UK corporate sector is lower than it was in 2009.
The market, preoccupied with safety, is not doing a good job of distinguishing between the real and the merely imagined risks.
As with any investment, the price you pay at the outset is the key determinant of total return and the main, and most reliable, contributor to that return is income, not capital appreciation.
A starting point of a double digit income yield stacks the odds in favour of a very satisfactory return.
Property is a corporate bond in the form of a building and no more risky – it just comes with three times the income.

Landlords warned of buy-to-let mortgage rate rises

Rates on buy-to-let mortgages are set to rise in coming months, a study has warned.

Rates on buy-to-let mortgages are set to rise in coming months, a study has warned.

Landlords, along with other buyers, have benefited from the Government's Funding for Lending Scheme in the past year with the cost for a five-year fixed rate for those with a 25pc deposit tumbling from from 6pc to just over 5pc, including fees.

But the report, published by Mortgages for Business, warned that comments from central bankers about improvements in the economy had moved money markets enough to force a rise in the rates offered to landlords.

The report said: "In what may turn out to be the most significant change for many months, the steady drop in rates appears to have halted and five year fixed rates are now around 0.2pc higher than they were at the end of May."

Fixed rate mortgage pricing is heavily influenced by "swap rate" markets. This is where banks, building societies and specialist lenders borrow tranches of money over a fixed period to lend on to consumers at a profit