UK Investment in Properties

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Table of Contents

Introduction
The Cycles of booms and crashes in the UK investment properties
Efficient market hypothesis
Advice to investors on investing in properties
Conclusion
Reference List

Introduction

The term investment has been the topic of discussion among most ‘enlightened’ people throughout the globe. As a result the current globalization rate has made people to venture into various business and finance options in a bid to earn more income. People as well as business enterprises have opted to embark on investment as the better choice of acquiring quick and reliable income.

Investments can be of various types such as capital markets which include shares and bonds, banking and property investment just to mention but a few. All the aforementioned investment options have their own types of risks with the common ones being valuation risks, force of sale risks and the business risks (Ball and Grilli, 1997, p.280). Despite the risks accompanying the investment options, people and corporations still strive to venture into investment business because in most cases if well managed investing is very profitable.

A common way of investing is through the investment property which entails purchasing a commercial property or real estate with the aim of gaining returns within a given period of time or even eternity. In most cases the owner of the investment property rarely makes use or occupies the property. In instances where the owner occupies it, they will use only a portion of it and let out the rest.

After certain duration of time, the property is completely paid off and the purchaser continues to enjoy the income generated from the property (Ball and Grilli, 1997, p.280). Investment property is a type of investment option that is practiced throughout the globe. This paper is a discussion of how the UK-investment properties have been characterized by booms and crashes and if they go against the efficient market hypothesis as well as advising an investor about investing in properties.

The Cycles of booms and crashes in the UK investment properties

The United Kingdom has been categorized as one of the most developed nations of the world. For a long time UK has been among the stable locations for the investment property market (McGough and Tsolacos, 1995. p.47). However, in the recent past the investment property sector has been characterised by periods of high returns and those of negative returns hence making the sector unstable and unpredictable.

This on the other hand has lowered the investor confidence in UK making most investors opt for other locations to invest. The property investment market of UK has been known to boom then suddenly crashes before it booms again. Due to the reason that the property investment market is closely related to the country’s economy, whenever it crashes, the government does all it can to get things back to normal thus it booms.

The issue of booms and crashes in the UK property investment market was of concern even in earlier years before the globalisation era (McGough and Tsolacos, 1995. p.47). For example, UK is characterised by two major crashes of 1974 and 1990 which had significant impacts on the economic system of the nation.

While the 1974 crash caused severe crisis in the banking sector of UK, the 1990 crash led to a reduction in the value of corporate assets. This in turn affected the economy of the nation making it drop down from being among the best world’s economies. Other than the two crashes mentioned, UK has been suffering incidents of crashes due to various reasons which some of them could be the following;

Property development restrictions- There could be reasons that could be hindering investors in investing in properties. These could be laid down by the state or municipality officials hence barring potential investors from choosing to invest in real estate property (McGough and Tsolacos, 1995. p.47).
Taxation- The tax imposed in materials and services used in the development of properties could be so high making the cost of investing in real estate high. This will again cause a reduction in the number of people investing in properties which in turn negatively affect the market of investment properties thus a crash.

Other causes of crashes in the investment property sector could include economic and political instability among other reasons. However, the duration of the crash or rather the amplitude depends on the period of government intervention or self-recovery from the crash (McGough and Tsolacos, 1995. p.48).

The famous booms of investment property in the UK occurred in 1989 and 1992. The 1989 boom made the economy of UK to double up thus raising it to the top. Booms occur as a result of favourable conditions in the investment market which would make investors comfortable to develop real estate properties (McGough and Tsolacos, 1995. p.47).

These conditions could include fair taxation, favourable political and economical conditions, and high demand in real estate property among other factors. When a boom occurs the investment market generates high income that in turn makes the economy of the nation go up due to the high value of the pound in the global market.

Efficient market hypothesis

The concept of efficient market hypothesis is very important in the investment sector and especially the property investment market. It entails provision of all the information about the market value being reflected in the prices (Malkiel, 2003, p.1). Efficient market hypothesis is related to the notion of ‘random walk’ which states that a change in price in investments represents a slight move from the previous price of the investment or market share.

The coordination of the two implies that a change in price is independent of the previous one and will be immediately reflected in the market, thus the disclosure of the information (Malkiel, 2003, p.1). The efficient market hypothesis was used much in the vast ages where most economists and statisticians had the belief that it was difficult predicting the market prices. However, the situation has in the recent past changed given the research of some economists.

The economists have argued the fact that it is possible to predict the future market prices. Efficient market hypothesis go further to claim that an investor is only in a position to earn high profits after undertaking high risks. Thus, the term efficiency is controversial with the recent economists arguing that efficiency means having less risks in the market (Scott and Judge, 2000, p.1).

In the context of the booms and crashes of the UK investment property market, it does not fully represent the efficient market hypothesis. This is because a market cannot be fully efficient so that one is able to perfectly predict the future outcome.

As mentioned above, efficient market hypothesis indicates that changes in prices of the market will be immediately reflected in the property prices (Malkiel, 2003, p.1). This is not the case in the property investment of UK because; this unlike other investment types is long-term with slow reflection of the market prices.

In addition to this, efficient market hypothesis argues that it is not able to predict future market prices, while in property investment market given the cycles of booms and crashes it is able to predict the market prices of the investment properties. This is because, from the trend, property investors would expect that a crash would lead to a boom in the next cycles hence able to predict the price thus the choice of cause of action.

Advice to investors on investing in properties

Property investment is among the top lucrative businesses in the United Kingdom and the whole world at large. Because of this, investors have to acquire the best advice from financial advisors lest they make the wrong choice.

Since all the investors of the property investment venture in the market with the aim of gaining profit, it is important that they achieve their goal (Hebner, 2007, p. 243). Among the advice given is to ensure that the investor has adequate information concerning the property, the market situation, prices among other factors. This would enable one to make a sound decision based on the information they have got.

Choosing the UK market as an investment location is a good idea because of the following reasons;

There are available sources of funds from money lending institutions for willing investors who may not have all the required funds.
The economy of the United Kingdom has been favourable for property investment despite the little havocs that have affected it (Hebner, 2007, p. 243).
The United Kingdom has an ideal market of property which investors would be looking forward to investing in.
In addition to the stable economy of UK, the nation has a stable and favourable political environment.

These are just some of the few reasons as to why one would be advised to invest in the UK property investment market. Nevertheless, given the concerns of booms and crashes, it is important that an investor predicts the market price of property investment before making the decision of investing (Hebner, 2007, p. 265). This is to avoid losses that could occur as a result of negative returns.

Conclusion

From the above discussion it can be concluded that the fact that the UK investment properties is characterised by periods of high and negative returns is an indication of riskiness in this business. This evidence goes against the efficient market hypothesis because of the reason that the economists have argued that prices of the real investments are partly predictable (Shiller, 1999, p.103). This therefore is an indication that given the right advice, an investor in real estate would be in a position to avoid the risks involved in the venture.

Despite the fact that the UK property investment has been characterized by the booms and crashes, it is still a good location for investing because of the opportunity and benefits that come in hand with investing in the UK market (Shiller, 1999, p.103). Last but not least is the fact that, the knowledge of the cycle that is being aware of when a boom or crash is expected would equip one with the instruments of avoiding risks and making profits.

Reference List

Ball, M. and Grilli, M. (1997) UK commercial property investment: time-series characteristics and modelling strategies, Journal of Property Research, 14, 279± 96.

Hebner, T. (2007). Index Funds: The 12-Step Program for Active Investors, IFA Publishing.

McGough, T. and Tsolacos, S. (1995) Property cycles in the UK: an empirical investigation of the stylized facts, Journal of Property Finance, 6(4), 45± 62.

Malkiel, B. (2003). The Efficient Market Hypothesis and Its Critics. Web.

Scott, P. & Judge, G. (2000). Cycles and steps in British commercial property values. Web.

Shiller, R. (1999). Human Behaviour and the Efficiency of the Financial System Handbook of Macroeconomics.

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