The Total Returns of an investment, expressed as a percentage, are the amounts received (all dividends and proceeds from sale of your investment) divided by the Total Cost of that investment (cost of acquiring the shares and Transaction Costs).
Gearing increases both potential returns but also risk. The provider of debt receives a fixed return in the form of interest and does not have exposure to property price movements. For example, on the disposal of a property, the debt is required to be paid as a priority before payments to Property Partner investors.
Investors in the SPV therefore have the entire exposure to movement in the property price. This amplifies the impact of price movements. The examples below illustrate this:
Illustrative example of Capital Returns
| No Debt Purchased | Debt at 50% Purchased | No Debt In 5 Years | Debt at 50% In 5 Years | No Debt In 5 Years | Debt at 50% In 5 Years | ||
|---|---|---|---|---|---|---|---|
| Property Price Movement | -20% | -20% | 20% | 20% | |||
| Property Price / Value | 500,000 | 500,000 | 400,000 | 400,000 | 600,000 | 600,000 | |
| Debt Raised / Repaid | 0 | (250,000) | 0 | (250,000) | 0 | (250,000) | |
| Investment / Proceeds | 500,000 | 250,000 | 400,000 | 150,000 | 600,000 | 350,000 | |
| Capital Profit | (100,000) | (100,000) | 100,000 | 100,000 | |||
| Capital Return | n/a | n/a | -20% | -40% | 20% | 40% |
Note: the above calculation is for illustrative purposes only and to help explain the impact of leverage on capital returns. There are other factors that impact capital returns, such as amortised purchase costs and deferred tax. These are presented in more detail on the respective Properties’ page.
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