Property investors have a weakness. A property investor my have focused entirely on creating and maintain a property portfolio. The primary goal of the portfolio is likely to be income. Nevertheless, the capital value of the portfolio will still be important.
Disposals will be made from time to time, to balance the portfolio, for tax purposes or whatever. The property investor tends to put all eggs in one basket, in that the only asset in the portfolio is property. If property prices in general fall the portfolio value also falls. A solution to this problem is to hedge against a fall in property prices, so that the overall value of the property portfolio is not negatively affected. Spread betting can allow a property investor to hedge the value of their investment, from just one property to over one hundred.
Learning about spread betting
Spread betting is a financial product and spread betting companies are regulated by the UK financial services authority. Spread betting is useful in this context because it allows retail investors to hedge the value of an investment portfolio. For those unfamiliar with spread betting it is advisable to get spread betting explained before using it to hedge the value of a property or portfolio of properties. In a nutshell, a spread bet can be taken on a house price index.
If the house price index drops the value of the spread bet increases. This offsets the any fall in the value of the property portfolio. In fact to hedge the price of property a spread bet can be taken on any asset that drops in tandem with house prices, for example, the share price of a property developer for instance. Although, spread betting on company shares does involve more knowledge of how these things work.
Spread betting companies take spread bets on various housing indices like the HBOS price index. The spread betting company will offer a spread on the index around the current value. If the value is say 100 the spread may be something like 98 – 102. The spread bet either is either taken long (profits if the index goes up) or short (profits if the index goes down). The costs of spread betting is taken into account in the spread that is offered: the larger the spread the further the index must move before the spread bet moves into profit or loss. The spread betting company will take a position in the market direct via financial derivatives that allows them to make a profit.
Different styles of investment
A short spread bet should be taken on a property index to ensure that the value of the spread bet increases if house price drop. Spread bets will normally be offered on each point of the house price index. For instance the stake could be for 1000 pounds per one point drop in the index. If the index drops 10 points below the company’s spread the spread bet would be 10 thousand pounds sterling. It is important to understand what a one unit drop in the index value would do to the average house price to get an idea of how it would change the value of the property portfolio.
The size of the spread bet stake would be made in order cancel a drop in value. Difference house price indices cover different areas of the UK. It would be a good idea to consider spread betting companies that allow spread betting on a regional index that matches the property portfolio more closely.
Spread betting on property to hedge a property portfolio does involve some risk. If the property index increases the value of the spread bet will go down. A spread bet is time sensitive and has an end.
Normally up to a few months. If at the end of this time period the property index is higher the spread bet will lose money, whereas the value of the property index will be higher. If there are no disposals from the property portfolio this could result in an overall loss to the property portfolio. However, if the property investor knows that property disposals will be made over the next few months spread betting a property index is the perfect way to hedge a portfolio value.