Wellington Property Investors' Association

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wellington@nzpif.org.nz

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01-02-2011

The risks associated with long term property investment

 

There is a particular risk that has showed up recently and that is building a property portfolio in a single area.

The recent events such as the Christchurch earthquake and the Queensland floods have caused huge problems for the local populations and even loss of life. These natural disasters have also caused many problems for property investors and their tenants in both areas. These problems will have been especially bad for investors who had all their properties in the one area.

Natural disasters seem more common now than in the past , so the risk appears greater than previously thought. While insurance will help ease the financial burden, it is unlikely to cover everything, especially the time that managing these events invariably take. In some instances, such as tenants becoming afraid and leaving the property, even insurance may not cover you for losses.

We have always recommended that investors spread their risk by investing in more than just property. Many did , including myself, but the property investments always outshone the other investments, mainly due to the gearing factor. Property quickly became the highest percentage of an investment portfolio, through growth.

 Property investors have also been encouraged to spread their risk in property investment as their portfolios grew. This did not just mean buying property in different locations but also buying different types of residential property:

        -Apartments

        -Blocks of flats

        -Older houses

        - New builds

Diversification within property can also be achieved by investing in commercial property as well as residential. Even within commercial property investment it is possible to spread the risk through the different options of Retail, Office, Storage and Industrial buildings.

Many investors purchased properties in different towns and cities, but this was mainly because of yields rather than the physical risks of grouping investments in a single area.

Of course there are advantages to buying property in your own home town. Some of these advantages include:

·         Knowing the best suburbs to buy in

·         Opportunity to more easily view properties for sale

·         Keeping a close eye on their investments 

·         Option of being a hands on landlords

·         Ability to undertake their own maintenance and repairs

With the world wide financial crisis and climate changes and natural disasters, maybe it is a wakeup call that there is a greater risk in putting all our investments in one geographical basket.

Is it even too risky to have all our investments in 1 country?  This could easily be argued with all that we have seen happen to the property market in USA. We also saw last year that with changing governments in New Zealand there is a risk that laws could completely change the viability of a property investment.

It is not easy to change a current portfolio quickly, however measures can be taken to lower the risk, such as sound insurance policies and an awareness of what the outcome could be if a natural disaster occurred where all your properties are located.

When doing due diligence on future purchases, perhaps the risk of being in one area should also be considered.

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