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.
Open Ended Funds
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
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?
Written by Mark Lloyd, Managing Director of Max Property Group UKand Director of “How to become a Property Investor” company – Property Mastery Academy.
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.