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Product matters

Residential investment opportunitieshave been high on IFA wish lists over the past few years but there has been precious little available to satisfy investor demand.

Consequently, most of the money chasing the returns from this asset class has gone down the buy-to-let route.

The bull market in UK house prices is now running out of steam but it is nevertheless interesting to see details of the Black Sea fund, a residential investment fund which will provide exposure to holiday properties in the emerging market of Bulgaria.

On paper, the attractions of the fund are significant. The ability to buy off-plan at an average discount of 50 per cent in a European country that is converging and with an internal rate of return forecast of 41.2 per cent all adds up to a pretty powerful investment story.

Further, a capital protected option with a forecast IRR of 12.2 per cent seems to provide a copper-bottomed way of accessing the potential. F&C is providing the protection at the seventh anniversary.

As for gearing, the effect of the fund buying properties at a discount and with just a 20 per cent deposit at the point of exchanging contracts means it could effectively achieve 10:1 leverage with no bank debt.

This is an extremely high level and explains how the IRR forecast for the unprotected version can be so high. Despite the apparent merits of the offer, this is not a fund that IFAs should be promoting to the average client. It is a specialist investment best suited to wealthy investors who want to add a new angle to their portfolio.

James Dalby is head of investment strategy at Bates Investment Services

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