Buy-to-let investors are returning to the market — and for those without big City bonuses to plough into bricks and mortar there are cheaper ways through the door.

More surveyors reported a rise in inquiries in the three months to September and Savills, the estate agent, said that City bonus money is driving the resurgence: £1.2 billion of this year’s bonus payments is expected to find its way into the property market, notably in London and the southeast.

“City bankers who see the stock market as overvalued and deposits and bonds as low-yielding look on 5%-plus yields from residential lettings — and the prospect of good, long-term capital growth — as an attractive return,” Savills said.

Buy-to-let finance remains difficult to come by but for those without big bonuses to spend, there is a growing number of residential property funds.

This week sees the launch of the Candy & Candy Growth fund, set up by Nick and Christian Candy, whose wealth is put at £330m in the latest Sunday Times Rich List.

The fund will buy residential properties in prime London locations directly from receivers or forced sellers at discount prices. It aims to raise £100m, and will target returns of about 10% a year.

Properties will be let for a minimum of three years and then renovated by Candy & Candy, the brothers’ luxury furnishings business, which the manager hopes will add further value before the fund’s assets are sold. It will have a set life-span of seven years.

Guernsey-based CPC Group will act as investment manager for the fund, which requires a minimum investment of £50,000. Christian Candy said: “Few commentators would question the viability of central London residential property as an asset class. We have the opportunity to acquire stock at realistic prices while rental demand remains high and capital values are beginning to move in the right direction.”

House prices rose 1.2% in October, the fourth consecutive monthly increase, according to the latest figures from Halifax.

The Candy brothers will themselves invest in the fund, which can be accessed with a minimum £20,000 if held within a self-invested personal pension (Sipp).

Investors with less cash to spare could go for Dualinvest, an income fund launched in September that offers private investors access to purchase-and-leaseback deals from developers and housebuilders.

Launched by Smith & Williamson, which is also overseeing the Candy & Candy fund launch on Tuesday, the £25m Dualinvest fund has a minimum investment of £10,000. It is managed by Harvey Shulman, former managing director of Solitaire, the property firm.

Dualinvest buys 65% stakes in new-build residential properties, which are then managed by large buy-to-let landlords for two years. It aims to give a rental return of 13.5% in the first year, with a cumulative return of at least 7% a year, after fees. Investors’ capital will be protected provided the portfolio’s value is not down by more than 30% because the landlords will shoulder the entire loss up to that point. In return, they take 85% of any capital growth, with investors getting only 15%. The fund is listed on the Channel Islands Stock Exchange and investors can sell their units at any time. It can also be held in a Sipp.

John Hitchcox, founder of Yoo, the development and design group, is also poised to launch an investment vehicle to buy and develop residential schemes that have been hit by the credit crunch.

Here we look at the pros and cons of property funds:

THE PROS

Property funds give investors exposure to the sector without the need for mortgage finance. The number of buy-to-let mortgages on the market has plunged 93% — from 3,648 in July 2007 to 239 today — said Moneyfacts, the data firm.

The lowest buy-to-let rate is a two-year tracker from NatWest at 3.39%. It requires a hefty deposit of 60%. The next-best deal, from Whiteaway Laidlaw bank, is a two-year tracker at 4.69%, with a 2.75% fee and 70% deposit.

Both the funds outlined above invest in prime areas that are leading the recovery. Prices in central London rose 8.4% in the six months to the end of September and Savills expects them to grow 18% over the next three years and 35% over five, against 14% and 30% for the prime regional and country house markets.

Hannah Edwards at Killik, the broker, said: “These closed-end funds offer the ability to tap into a certain level of expertise with some capital protection. The target income of 10% and 7% could be valuable for investors chasing income in today’s low savings-rate environment.”

Moneysupermarket, the comparison firm, said the highest-paying fixed-term bond is Skipton building society’s five-year fix at 5.38%.

THE CONS

Investors should weigh up all the risks before taking the plunge. While the property market has taken off this year, many analysts expect prices to fall back in 2010. Savills predicted last week that prices would fall by an average of 6.6% across Britain next year.

However, London and the southeast, where the new funds are investing, are likely to do better thanks to the influx of bonus money. Savills expects prime central London and prime regional markets to fall by no more than 1% in 2010.

Danny Cox of Hargreaves Lans-down, the adviser, recommends putting no more than 5% of a portfolio in property. “Next year still looks fairly anaemic for the housing market, as unemployment continues to rise and the mortgage market remains weak,” he said.

For those who want extra exposure, Cox prefers commercial property funds. He likes Threadneedle UK Property, which has lost 4.9% in the past year against losses of 35.2% by New Star International Property, Trustnet said. It is yielding 3.3%.