Buy-to-let funds

As we all know buying and managing property is a time consuming exercise starting with sourcing the buy-to-let property married to the continual demands of property management.

There are less intensive alternatives of investment such as Private Leasing Schemes, but their availability is patchy.

In a housing market where short term recovery is far from certain many investors are looking to avoid the large amounts of both time and financial resources that buying a buy-to-let property require.

An alternative that increasing numbers of investors are tapping into is buying into a buy-to-let investment fund, is this a good idea?

Five advantage of direct property investment

There are a number of advantages of buying an investment property outright. The main advantages of direct investment are as follows:

1. A landlord who buys property directly can potentially benefit from the development profit from improvements to the property. They can then potentially use this as their deposit when they come to refinance.

2. Landlords self manage their own BTL property will save on the rental management charges which typically can amount to 15% of the gross rent.

3. Savvy landlords are often able to use their experience and expertise to ‘pick up a bargain’ or so called BMV property profiting on buying cheap as well as longer term investment returns.

4. Landlords can time the purchase and potential exit of the investment by sale to suit their own particular fiscal objectives

5. Landlords can gear their investment using a buy-to-let mortgage. In this way they can increase their returns dramatically. The downside should investment values fall is however potentially very great.

Five advantages of investing in a buy-to-let fund

1. The most obvious advantage to a landlord investing in a residential fund is that a landlord becomes a passive investor. The letting and management of the properties will be taken care of by the fund managers and their chosen letting agent. Both will extract their ‘pennith worth’ for this by charging management fees and depleting the income payable to investors but at least you can keep your hands clean.

2. Diversification – many landlords particularly those that self manage their properties are restricted to buying property in one particular geographic location. This restricts exposure to certain parts of the residential market that may have greater potential to see higher growth than their local market. As well as geographic diversification there is also the potential diversification into different sub sectors of the housing market. For instance not many of us have the kind of cash that will allow us to buy super prime London property at a million pounds a pop. A buy-to-let fund potentially allows an everyday landlord to get exposure to these niche sub markets.

3. Size of investment can potentially be much smaller. Some buy-to-let investment funds allow a landlord to invest smaller amounts than required for a direct purchase of a property in order to secure an initial investment.

4. Investing in a buy-to-let fund will give a landlord potentially much lower exit and entry costs and therefore greater liquidity. Landlords that buy funds that are quoted on the stock market are able to sell their investment immediately which means that funds along with any gains can be realised instantly. Costs for buying and selling share based investments are much lower than with direct property ownership. To buy or sell shares stockbroker fees often start at under £10 although there is an additional charge to an investor as there will be a ‘spread’ between the buying and selling cost.

5. A landlord can potentially place some buy-to-let funds in their pension through the mechanism of a Self Invested Personal Pension (SIPP). This is a tax efficient way of investing in buy-to-let property because it allows a landlord to invest their gross income into a fund and avoid paying income tax on their investment capital. The downside is that the funds must stay within the pension pot which restricts what a landlord can do with it and also how the capital can be utilised once the pension is drawn down. A directly held buy-to-let property cannot be currently held in a landlord’s pension and therefore is unable to benefit from the favourable tax break.

Buy-to-let funds

This is a selection of buy-to-let funds currently or recently available. Buy-to-let funds are being released on a regular basis so look out for new ones being covered in the editorial and news sections of Property Hawk.

CR Property Fund

This fund plans to raise up to £300m and is backed by the UK’s largest property companies British Land. It is targeted at high value London properties and will have a life span of between 5-9 years. It is targeting a return of 14.5% and aims to pay an annual dividend of 2%. Minimum investment is £100,000. Read more in FT Adviser

Candy & Candy

Brothers Nick and Christian Candy developers of upmarket property have set up an upmarket buy-to-let fund.

The fund will buy residential properties in prime London locations directly from receivers or forced sellers at discount prices. It aims to raise £100m, and will target returns of about 10% a year.

Properties will be let for a minimum of three years and then renovated by Candy & Candy, the brothers’ luxury furnishings business, which the manager hopes will add further value before the fund’s assets are sold. It will have a set life-span of seven years.

Property Hawk has recently learnt that this fund is on hold but we will keep you posted.

Dualinvest

Financial Services Company Smith & Williamson is to launch a £25m unit trust fund for private investors to purchase UK residential property from distressed developers and house builders.

The fund called Dualinvest will be a 2-3 year closed ended ‘umbrella’ unit trust and is suitable through investment through a SIPP or SSAS.

The scheme will use the equity to buy a 65% interest in new build residential properties and then enter into a 2 year lease agreement with the sellers, giving the fund a 13.5% return in the first year.

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