FM102 Solutions Test 2 Semester 2 2016

Correct answer c section b short answer questions 7

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Correct answer: c SECTION B SHORT ANSWER QUESTIONS 7 Marks _____________________________________________________________________________________ 1. Imagine you are having a discussion with a friend about investment in property. Your friend favours a direct form of investment because of the costs involved with a property fund but would like to know the benefits of investing in a property fund. Discuss three (3) of these benefits. (4.5 marks) Solution: (3 x 1.5 marks) Property funds provide the opportunity to invest in a number of properties, allowing investors to diversify their portfolio by location, size and sector (for example, office, industrial, shops, hotels) for a relatively small initial outlay. They are a ‘unitised’ investment, allowing the buyer to purchase a parcel of units representing a pro-rata entitlement to the distribution of income which is derived generally from rent from the trust’s properties. This also provides a benefit in terms of selling the investment as unlike direct property, partial sales can be undertaken. This provides a significant degree of flexibility and reduces the pressure on the investor to have to time the market for both entry and exit as is the case with direct property investment. In addition, property funds do not require management by the unit holder because the ongoing maintenance and management of the trust is undertaken by the Responsible Entity (manager). The only decisions required by the investor are the buy or sell decision and those related to voting at general meetings. Hence investors that are time-poor are likely to be attracted to this form of property ownership.
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