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Product matters

The Scottish Mutual commercial property plan will probably interest a fair proportion of the investing public who are to some extent being led by the nose away from equities and into property.

Buying an office block or factory is out of the reach of most people so a collective-type investment presents the answer.

The plan will mature on January 15, 2013 at the latest. We have all seen what has happened with a number of structured products with fixed maturity dates. If on January 15, 2013, we are in a property crash, then investors could see capital losses.

Since we are in a property bull market and the market is cyclical, it would come as no surprise if we see prices drop between now and maturity. We would much rather that a plan of this sort was open-ended so that investors can choose to cash in all or part when markets are favourable.

The release appears to be contradictory in that it refers to initial gearing being less than 60 per cent of gross assets and then states that long-term borrowing will not exceed 65 per cent of gross assets.

I sought clarification from Scottish Mutual but this was not forthcoming. Whether it is 60 per cent or 65 per cent, the gearing does seem on the high side. So far as the anticipated yield is concerned, this is optimistic. Time will tell whether the anticipated yield of over 7 per cent can be achieved and held for the term.

No reference is made to liquidity of the fund, which would be of enormous importance to anybody who wanted to cash in early. If there was a run on the fund, would it entail selling assets? How long would an investor have to wait to be paid?

Colin Jackson is a director at Baronworth Investment Services


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