Property investment funds can be a good way of investing in property as they offer the advantages of spreading risk and avoiding ownership issues. In a relatively developed market it is important to identify the advantages and disadvantages of each fund type. Choosing the right type of property fund requires an understanding of these characteristics and how they can affect returns, risk and liquidity.
An open-ended fund is listed on an exchange and the shares are therefore publicly tradable. This presents the advantage of effectively being able to “cash out” at any time and gaining direct access to your investment capital. It is however important to take into account that an open-ended property fund only has a limited amount of cash reserves and by far most of the money is invested in bricks and mortar. Things can go desperately wrong if there is a “run” on the fund, with everyone wanting to take out their money. Logically, the fund cannot sustain its cash reserves under these circumstances, assets then need to be liquidated quickly and are ultimately sold at a discounted rate. Many of the funds we read about as having “crashed” are subject to this type of scenario. As long as everything goes well, open-ended funds offer greater flexibility but tend to be more sensitive if disaster strikes.
Closed ended funds are a collective investment model based on issuing a fixed number of shares or bonds. The disadvantage of this type of fund is that your money is often tied up for the length of the investment and generally cannot be accessed at all. Closed ended funds tend to offer higher returns than open-ended funds, but it is important to pay very close attention to the returns distribution and financial model.
Before investing in any property fund, ask questions such as:
· Is there a fund manager who gets paid regardless of the fund’s performance?
· If the fund performs poorly, do the principals still get paid?
· Is it a development fund, can it be subject to building delays and therefore delays in returns?
· Are the returns offered realistic for the duration of the fund?
· Who is protecting the assets?
· Does the financial model show a sensible bad-case scenario?
· Are there sufficient buffers in the financial model to allow for realistic situations?
· Most importantly, do you share in the profits if things go well?
If you would like to receive more information on this topic, or indeed would like more information about one of Max Property Group’s property funds, do not hesitate to contact us.
Brexit & Risk
You have to have a certain appetite for risk to be purchasing property in the UK amidst Brexit uncertainty and under the rule of a “weak” government, which does not have a clear majority in the house of commons. These political factors indicate a potentially rocky future for the UK government, economy and general stability.
There is a real risk to London’s high earning population, as several institutions such as Banks are moving their headquarters elsewhere. The London property market is slowing down as a result and prices are reducing overall in the City Centre.
This situation, however, presents certain opportunities that shrewd investors are taking advantage of.
The Pound Sterling is very low; not historically low, but low nonetheless. Therefore investing from outside the UK is potentially lucrative due to the potential uplift on the currency value.
Unlike the London downturn, prices in the North of the UK are rising fast, whilst remaining relatively low in comparison to the rest of the country. Occupancy rates are high and a well-selected portfolio could yield very high returns indeed. Additionally, a timely purchase could lead to attractive future value increases.
Add to this the changes in the mortgage interest relief act (S24 Finance Act 2015) that are causing landlords to offload their portfolios, and you have a unique opportunity to pick up ideal properties from fed-up landlords.
We at MPG believe that with the right combination of factors, this could be a rare window of opportunity to invest in one of the world’s most established property markets. With the experience and know-how to source the right properties, high yield can be achieved. With the right investment structure, many of the issues that private landlord are experiencing can be overcome. This might well be the perfect moment to enter the UK property market.
Written by Mark Lloyd, Managing Director of Max Property Group UK and Director of “How to become a Property Investor company – Property Mastery Academy”