A growing band of investors is betting that a recovery in the housing market
is in the offing and has been ploughing its money into residential property
funds.
Optimism about bricks and mortar has been in short supply over the past year
as house prices have plummeted. But bullish commentators claim there are
increasing signs that the ailing market is awakening.
Halifax reports that house prices rose by 2.6 per cent in May, the first
increase in four months and the biggest jump since October 2002.
A separate, closely watched survey, from the Land Registry, shows that prices
fell by only 0.3 per cent in April, the lowest monthly fall in a year.
Adding to the more positive mood, Nationwide Building Society’s index for
May showed that prices had risen by 1.2 per cent, the second time in three
months the lender has reported an increase.
Ray Boulger, of John Charcol, the mortgage broker, says: “In parts of London
prices have certainly bottomed out and nationally I would expect prices to
stabilise by September. I wouldn’t be surprised if prices increased towards
the end of the year.”
Not everyone is positive. Martin Gahbauer, chief economist at Nationwide,
believes that prices will continue to fall until at least December. He says:
“The past three months have shown a slowdown in the pace of decline but
there are still considerable headwinds. Unemployment is expected to rise in
the coming months and pent-up supply could re-enter the market as prices
stabilise, putting a downward pressure on valuations.”
Mortgage approvals in April were up 8 per cent on March, according to the Bank
of England. But they were still down 22 per cent on last year, suggesting
that a quick recovery is by no means certain.
Richard Donnell, of Hometrack, the housing market analyst, says: “Overall
levels of market activity are well down on what would constitute normal
market conditions. The willing purchasers who are returning to the market
are largely confined to the more wealthy areas of the country and limited to
those buying with cash.”
There may be disagreement about the future of the market and even optimistic
pundits are not predicting a boom in prices, but interest among investors
for property funds is rising.
Heavy discounts by distressed sellers and desperate developers have helped to
boost income yields for buy-to-let investments. Other less publicised
products, such as ground-rent funds, do not depend so heavily on a full
recovery in house prices and have managed to provide stable returns even as
the market has fallen.
Mark Ashton, of Ashton Hoyle, an independent financial adviser, says: “As
other assets have performed poorly, these funds are now attracting more
interest.”
Investment firms have launched several residential property funds in recent
weeks but should you consider dipping your foot back into the market by
adding a property fund to your investment portfolio? Times Money
looks at the options and considers the risks.
Ground-rent funds
A number of funds invest in the freeholds of blocks of flats and houses
meaning that they have a more stable income than most other types of
property fund.
Ground-rent funds collect a fixed fee from occupiers, typically £50-£100 a
year, although the charge varies.
If a leaseholder fails to pay, the freeholder has first charge over the
property, even before a mortgage lender. As a result, lenders will typically
step in and pay the ground rent to protect their claim on the property.
Steven Daniels, assistant director of property at Close Brothers, which runs
the Freehold Income Trust, says: “Ground rents are largely detached from the
value of property and the length of leases means that the income is very
stable for the long term. We’ve seen a lot more interest as yields on
government gilts have fallen and high-street savings rates have dropped
close to zero.”
The Close Freehold Income Trust has returned 6 per cent over the past year,
according to Trustnet, the data provider. Over three years it is up 21 per
cent, and over five years has risen 40 per cent.
There are risks, which apply to all residential property funds. Clive Rose, of
Savills Private Finance, a broker, cautions: “These funds offer good returns
but they are unregulated and tend to be aimed at more sophisticated
investors.”
Most residential property funds are available only through independent
Continued from page 65 financial advisers as unregulated funds cannot
advertise or produce marketing material. Before investing, experts recommend
that you do your research. Most funds are “closedended”; this means that
once you have invested, you will not have access to your money until the
fund closes.
UBS and Braemar also offer ground-rent funds. The minimum investment is
typically from £10,000.
Student accommodation
Like ground-rent schemes, student accommodation funds are not directly related
to rises and falls in house prices. They typically purchase blocks from
universities or fund the building of accommodation in towns with a large
university population.
The Brandeaux student accommodation fund, which requires a minimum investment
of £10,000, returned 11 per cent in the 12 months to the end of April this
year.
Supporters of the schemes say that the Government drive to push up university
applications will ensure that demand remains high. Figures from Ucas, the
university admissions service, show that there was a 10.5 per cent increase
in student numbers in the last academic year.
However, James Norton, of Evolve Financial Planning, says: “With less public
money to fund education, I would imagine it is likely that the recent rises
in student numbers could tail off soon and may even start to fall, which
would hit the returns provided by these funds.”
Regional funds
These schemes are focused on specialist areas of the residential property
market. The Prime London Capital Fund is one of the more accessible schemes
with a minimum investment of £1,000. Managed by the estate agent Douglas &
Gordon, it invests in top-end London property, as does the Hyde Park Fund
run by BDO Stoy Hayward Investment Management.
Distressed-seller funds
The success of these schemes is linked directly to a recovery in the property
market, making them a riskier option. These funds aim to buy properties from
distressed sellers — thereby securing discounts of up to 70 per cent of the
original price. The properties are then rented out to provide a return.
Assetz runs the UK Residential Recovery Fund. London Central Portfolio
recently launched the London Central Residential Recovery Fund, which seeks
to buy distressed assets in areas of the capital such as Knightsbridge and
Mayfair.
Most advisers suggest that you steer clear. Mr Norton says: “Quoting the
discount on the original property price of up to 70 per cent is meaningless.
If a property did not sell for say £200,000 in 2007 and it is bought for
£140,000 now it suggests that it was overvalued two years ago.”
Christopher Moore, 43, and his wife Kimberley, 38, have put £10,000 into the
Close Freehold Income Trust, a ground-rent fund.
CASE STUDY: ‘Fund offers a stable, and safer, income’
Christopher Moore, 43, and his wife Kimberley, 38, have put £10,000 into the
Close Freehold Income Trust, a ground-rent fund.
The couple who live in Colchester, Essex, say that they were attracted to the
fund because it provides a stable income. They also consider it to be safer
than other types of residential property investment.
Mr Moore, who works as a director in risk management at a big investment bank,
says: “The returns elsewhere are so atrocious that the ground-rent fund from
Close looked quite attractive. There is never going to be a case where
ground rent is not going to be paid. Even if the holder of the lease would
not pay, the mortgage lender would step in.”
The couple do not have a wide range of investments, although Mr Moore
occasionally engages in share trading. However, with two children, aged 2
and 7, they want to plan their finances for the longer term.
“The biggest risk with a fund like this is liquidity. If hundreds of people
decided to leave there might be a problem, but I’m in it for the long term
so that doesn’t worry me,” Mr Moore says.
