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Isa building blocks

Direct-investment commercial property funds can now be held in Isas. Matt Davis reports

Changes to regulations at the end of last year mean funds investing directly in commercial property are now eligible for inclusion in Isas.

Before the changes, investors were only able to hold property funds in Isas that held the shares of property firms rather than bricks and mortar.

Standard Life, New Star, Norwich Union, Scottish Widows and M&G are some of the firms starting to push their direct commercial property vehicles, which are no longer the sole preserve of institutional investors.

But a glance at the performance of the two fund types could surprise some investors. The 370m Aberdeen fund is up by 112 per cent over the five years to January 23, 2005, a return achieved through investment in property stocks such as the British Land Company and Great Portland Estates, while the New Star property fund is up by just 59.7 per cent over the same period.

Bestinvest business development manager Justin Modray points out that property share funds are subject to the wider movements of equity markets and issues of supply and demand while direct-exposure funds make for better diversi-fication vehicles.

He says: “Funds investing directly in property are less likely to be affected by shocks to equity markets. We expect the recent changes to make direct commercial property Isas reasonably popular with higher-rate taxpayers, as they can save an additional 25 per cent income tax.”

Norwich Union plans to offering an Isable version of its property trust in March, managed by Gerardine Davies. Investment development manager David Hewison says the firm expects to benefit considerably from the change and anticipates a decent volume of Isa transfer business.

He says: “The principle area of benefit to us is that the changes allow customers who have built up significant Isa holdings in equities and corporate bonds to diversify their holdings into property. We are hopeful it could be a good transfer opportunity.”

Hewison and Modray agree that commercial property is not likely to be the next big thing for basic-rate tax- payers or first-time investors looking to invest this Isa season.

Modray says: “Tax benefits for basic-rate taxpayers are essentially the driver behind the introduction of Reits next year, so investors at this end of the market might potentially wait until then.”

New Star managing director of UK retail sales and marketing Phil Wagstaff says the benefits for property fund providers from mass-switching by people already holding Isas and Peps could be considerable.

He describes the previous situation as an obvious inequity, with investors able to enjoy favourable tax treatment in cash, equities and bonds but not direct property. The Pep and Isa market is worth 82bn and New Star’s property fund, run by Roger Dossett and Stephen Whittaker is looking for a slice of the cake with an aggressive advertising campaign running in the first quarter this year.

Wagstaff says: “With intermediaries recommending a 5 per cent to 15 per cent property portfolio weighting, this would indicate a potential Isa and Pep transfer market of some 4bn to 12bn.”

Commercial property has continued to receive positive press over the last year because of its diversification benefits despite predictions that returns may continue falling from highs seen in 2004. That did not deter M&G, Skandia Investment Management and Standard Life, among others, from launching direct property funds in 2005, pointing out it is a long-term game.

Standard Life launched its select property fund in November last year and product manager Gerry McGrath says the fund was designed with Isa investors in mind. It holds fixed-interest funds and cash alongside direct properties to ensure liquidity.

He says: “When we developed the select property fund, we had a virtual guarantee from the Government, saying the changes would go through as soon as possible, subject to two conditions. They wanted the vehicles to have a two-week liquidity timeframe and no limited redemptions, with the the argument being that Isa investors are supposed to be able to access their money directly.”

With so many property funds coming to the market, McGrath adds that the role of advisers in ensuring investors do not invest in the asset class if it is inappropriate for their risk profile or tax planning is stronger than ever. This is particularly relevant for Isa investors who are often less experienced than those looking to invest through other wrappers such as Sipps.

Taxcafe managing director Nick Braun is the author of investor guide, Grow Rich With a Property Isa. The guide’s cover features a photo of a piggy bank, encapsulating Braun’s attitude to the funds as long-term savings options.

“Some funds have significantly different weightings of retail, industrial and offices, so if you have strong feelings that, for example, retail property is overpriced, then stick to a fund investing in offices and factories,” he says.

He cautions investors in property Isas to choose their funds carefully and says that patience will bring rewards and enable them to gauge the potential of newer launches.

Braun says: “It may be too soon after the changes to distinguish between unit trusts and investors may want to wait while the various fund management companies get their offerings out before choosing between them.”


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