Type: Closed-ended fund with capital protected option
Aim: Growth by investing in residential Bulgarian properties
Minimum investment: Lump sum £30,000
Investment split: 100% in Bulgarian residential property
Place of registration: Jersey
Term: Seven years
Closing date: February 28, 2005
Charges: Initial 4% excluding IFA commission, annual 2%, performance fee 20%
Commission: Initial up to 5%
Tel: 020 7399 4270
Development Capital Management’s Black Sea property fund in a closed-ended fund investing in Bulgarian residential property.
Chase de Vere Financial Solutions research manager Justine Fearns feels this will not have wide appeal and will need to be targeted well both within the industry and to individual investors. She believes that if the marketing is not handled properly, problems could occur.
However, Fearns finds many positive things to say about the product. She says: “On first glance this would appear to have a lot to offer. Firstly, it is purely focused on property, which until recently has been largely under-used by retail investors.
“Secondly, Bulgaria is a potentially attractive investment arena as it is on target to join the EU in 2007. Converging countries have historically offered some attractive and exciting investment opportunities, generating interest from a number of areas.”
Fearns suggests the product’s investment term of seven years could be of interest to investors who like a definitive timescale of potential return. She points out that it offers investors three ways to invest through capital protected units, property shares, or a combination of both, with the potential returns on the property shares being highly attractive due to gearing.
She says: “These options clearly cater for three different appetites to risk and could be seen as a very useful feature. Having said that, one has to consider the types of return that are available and at what risk.”
Fearns highlights the management team’s experience of investing in early stage residential property development, but stresses this in the UK not emerging markets. She says: “The company appears to have researched its target market well and has secured existing options over a substantial amount of property already, which puts it in a very strong position.”
However, she regards the charges as a little on the high side but adds: “I would expect that with a more sophisticated product like this, and commission will be set at adviser discretion, which may ultimately increase costs further unless rebated.”
Looking at the product literature, Fearns says: “This is fairly clear and certainly gets the positive points across well. The risk factors, of which there are many, are discussed in very small letters but are nevertheless comprehensive.”
Discussing these risks and the potential downsides of the product in more detail Fearns says: “This is highly specialised and highly geared on the property share element, it invests in a single emerging economy, solely in one asset class and seeks to invest in early stage off plan development. I don’t have a problem with any of the individual considerations above and we often recommend geared products or specialist sector investment in a number of portfolios. However, when they are combined within one product, the overall risk is significantly increased.”
Fearns feels uncomfortable with the single asset class being retail property as most investors already have a heavy retail property weighting in their portfolio through their homes. She adds: “Currency fluctuation, a lack of liquidity, and investing in a foreign country where regulation and legislation may change will all run alongside the usual risks associated with investing in property.”
However, she thinks it likely that it will still be tolerable from a risk perspective for a small proportion of investors when combined with their overall assets.
Fearns suggests competition for this product will come from a number of European real estate funds coming into the market. She says: “These are likely to appeal to a wider audience as they are less focussed on a single region and offer diversity, so should, in theory, reduce the risk profile.”
In conclusion Fearns says: “A further point to consider is that a blue chip company, with a minimum rating of AA-, will back the Capital Protected Units. While it could be seen as splitting hairs, I would prefer to see the barrier raised slightly to AA, though I understand this would impact on the pricing.”
Suitability to market: Poor
Investment strategy: Average
Adviser remuneration: Average