If you don’t have the time or inclination to become a buy to let landlord but still want to invest in property, then a property fund may be right for you.
Property investment is big news.
Student lettings are attracting piles of cash from institutional investors – with around £2 billion expected to go into UK student housing alone this year, according to property consultants Knight Frank and CBRE.
On a sour note, retirement savers who have opted for more risky offshore hotel and resort ventures via self-invested personal pensions (SiPPs) look to have lost out as the Financial Conduct Authority warns about problems in the market.
However, trade body the Investment Management Association (IMA) is celebrating net sales of property funds of £98 million in April 2013 – the highest amount in 24 months.
Funds are a safer way for private investors to sink money into commercial property.
Economies of scale
Sharing the risk and diversifying assets with others is a good way for investors to avoid exposure to high risks.
Selecting the right funds is still important. Retail has taken a dive while offices in London and the South East are riding high.
Meanwhile, most analysts would suggest direct investment in buy to let.
While commercial funds can take advantage of economies of scale, it’s difficult for a fund to find enough residential properties in a tight geographical area to make management costs effective.
In comparison, buy to let investors can also choose the location and type of property they want and can exert more financial control to keep costs down and profits up.
A fund would prefer to buy and manage a block, while individual investors can select the best performing properties in a neighborhood or town. The individual wins on time and costs involved per property.
Property fund investors also have to consider the total expense ratio. This is the cut the fund manager takes for running the operation.
The figure is likely to run to around 2.5%, even if the manager has had nothing to do but process the rents. A commercial property fund can live with a ratio of this level, but residential yields are sliced to the bone.
“Residential property funds are more popular in Europe. The Continental lifestyle suits living in a rented apartment in a large block, whereas houses and smaller blocks of flats are more popular in the UK,” said an IMA spokesman. “That’s why new build schemes look like becoming popular with funds. A large number of closely grouped properties sit better with a fund.”