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House calls

Residential property is a huge asset class and Hearthstone’s fund spreads the risk

Once again, the FTSE 100 index appears to have 6,000 in its sights. Once again, shares have shied away as they approach this significant hurdle. We have been here before, of course – several times. Indeed, for all I know, we may already have breached the magic figure although last week saw the market falling just short on a couple of occasions.

Wall Street, on the other hand, does appear to be powering ahead. Improving economic data is bringing smiles to the faces of investors and returning confidence to the market as a whole. Of course, it is an election year, so we can expect the executive to do all in its power to regenerate a feelgood factor in the minds of the electorate. Long may it last.

Elsewhere, the signs are more mixed. China is undoubtedly slowing – as is Brazil, which recently overtook the UK to become the sixth-biggest economy in the world. Europe remains fragile, with Greece continuing to cloud immediate prospects, even if an uncontrolled default does appear to have been avoided. The real issue remains whether the eurozone countries can sustain economic growth while reducing debt.

As it happens, last week was uncharacteristically quiet, perhaps as investors waited to see what rabbits the Chancellor was likely to pull out of his hat on Budget day.

More likely it was because half of the City had decamped to Cheltenham for the festival. It is some years since I last attended this most remarkable racing event but it never ceased to amaze me how much networking it was possible to do so far from the Square Mile and in non-business environment.

“Housing is an emotional subject. The crunch led to a sharp fall in new houses being built – something the Government is anxious to reverse”

It is at times like this, when time is taken up with year-end tax planning and sufficient uncertainties lie over the horizon to discourage radical portfolio changes, that it can be worth looking at investment areas that get less attention.

I read with interest recently that Connells, the estate agency and property services group, had taken a stake in Hearthstone Investments, a specialist manager of residential property.

It happened that I had come across Hearthstone before. Started as recently as 2010, the company seeks to make available residential property as an asset class to those who might be unable or unwilling to invest directly, with any investment encompassing a range of properties, thus arguably spreading the risk. Given the continued popularity of buy to let, this struck me as an interesting proposition.

As it happens, their first fund is only now in the process of being made available but it did occur to me that residential property, so close to the heart of domestic investors, is a huge asset class.

Of course, it remains dominated by owner-occupiers, who probably should not view their home as an investment, although many probably do. But the difficulties of gaining access to the property market are increasing the proportion of true investment properties within the overall housing stock.

Housing is an emotional and sensitive subject for many. The credit crunch led to a sharp fall in new houses being built – something the Government is anxious to reverse. Inflation has flattered housing values in the past, driving up prices while effectively devaluing debt. No wonder bricks and mortar are viewed by so many as the only really secure investment.

The problem, of course, comes in liquidity, flexibility and costs – something the Hearthstone fund will seek to address. Costs are pretty much unavoidable but the fact that you cannot sell off the dining room or part of a bedroom when you need a little cash is a disincentive and one that should not be experienced if your involvement in residential property is through a fund.

But while this addresses flexibility, liquidity issues have plagued similar funds in the past. I wish them well, particularly as I remain personally optimistic over the likely direction of house prices. It will be interesting to see how they fare.

Brian Tora is an associate with investment managers JM Finn & Co


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