Residential status
Share
With UK homes having experienced steep falls in the past year, providers and property investors are seeing now as an opportune time for pooled investments in this area.
There are several residential funds being mooted, some by big houses such as Aviva and others by property specialists such as Garratt Property Group. Aviva is said to be consid-ering such a fund for institutional investors as part of the Homes and Communities Agency's Private Rental Sector Initiative, announced this summer. Aviva is one of 64 interested parties looking to work with the HCA to develop propositions for institutional investors to gain access to rental yields within the residential market.
The Garratt fund, structured as a Sicav Sif, is further along in development and broader in its aim. Targeted at inter-mediaries and professional investors, the fund features a £20,000 minimum investment level and will look to have a portfolio of up to 1,000, typically two to three-bed homes across the UK.
The group, formed by experienced property managers, intends to buy the properties at auctions at a price 15-20 per cent below a RICs valuation. That way, if house prices do fall significantly from this point - which many predict they are unlikely to do - the fund would effectively have a buffer. According to its managers, the Garratt fund will look to make an aggregate return of 70-100 per cent over a five-year period.
Amanda McHugh, one of the managers of the forthcoming fund, says: "Returns of 35-40 per cent are expected, even if the housing market remains flat."
McHugh says now is an advantageous time to launch such a fund. Property prices have already fallen a considerable way over the past year and many commentators are now forecasting a return to growth. In August, the National Housing Federation predicted that by 2014 house prices will be 20 per cent higher than current values.
It can be argued that the time is good for both commercial and residential property but there is still expected to be some wariness among investors looking at these propositions.
Mark Dampier, head of investment research at Hargreaves Lansdown, points out that the problem with residential for most IFAs is that their clients are already exposed through home ownership or even their own buy-to-let projects. He says proving a track record in fund management in this space is also difficult, considering the dearth of products that have been available for investors.
Dampier points out that liquidity is also a concern and has repeatedly proven to be a problem for property funds of all type in the past.
Commercial property funds in the UK were all the rage by the end of 2006 and yet just months later, values in this market began to fall. According to IMA statistics, the most popular net retail sector in 2006 was specialist with sales of £4.4bn, almost double the second best selling sector, UK equity income, at £2.3bn.
It was the sale of commercial property funds that accounted for the majority of sales in the specialist sector, with net retail sales of £3.6bn representing more than 80 per cent of inflows. Yet a few months later, in July 2007, commercial property funds began to suspend redemptions from their funds to avoid becoming forced sellers of property at a time when prices were falling.
That was not the first time that property had taken hold of investors' imaginations and then a short time later came to a screeching halt.
On the back of a residential property boom in the late 1980s, popular pension managers Target and asset managers Hendersons both launched retail residential property products that little more than a year later were suspended.
Those with long memories will tell you in many cases it took 12 months for investors to get any cash back out of these funds. Such was the infamy surrounding the Henderson residential product that this area of investment has stayed extremely quiet for almost two decades. Until now, that is.
So, have investors learned the lessons of the past and prepared to invest earlier now? With both commercial and residential property prices having fallen over the past couple of years and talk of them both now stabilising and starting to rise, will investors look to take advantage? Or should they still be wary?
It could be argued that property investing has disappointed and that fund investing in this area carries different risks, such as liquidity, that need to be considered carefully.
But perhaps what should also be considered and changed is that many investors tend to only get involved at the tail-end of the story rather than at its beginning. And maybe this is the beginning.
If you enjoyed this article, sign up here to receive daily email updates from Money Marketing and Follow @_moneymarketing
