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Investment: Collective Investment Schemes: Property Funds and REITS

Overview

For those with limited budgets, there are ways of investing in a portfolio of high quality properties without mortgaging everything you own. There are a range of collective investment schemes available which offer the opportunity to participate in large scale property investments for a relatively small amount of cash. Collective investment schemes operate like funds in which investors’ money is put together to purchase a range of properties.

Collective investment funds have numerous benefits, not least of which is that someone with only £20,000 ($35,000) to invest could gain access to the sort of returns only usually available with larger scale investments. Another benefit of collective investments is that they let people duck out of the process of researching markets, assessing when to buy and when to sell and all of the difficulties of finding and keeping tenants. They also allow people to invest in commercial and industrial property, the thresholds of which are set too high for most investors.

Different investment funds will have different objectives. Some might have the purpose of developing a resort or tower block allowing investors to make the same kinds of returns as developers, others may buy a range of off-plan properties from across the globe and flip them before completion. Whatever the purpose of the fund, its objectives will be laid out in a prospectus for investors to examine prior to committing their funds. The actions of the fund managers will be governed by the parameters set out in the prospectus, so you can be certain how your money will be invested.

BENEFITS OF COLLECTIVE INVESTMENT SCHEMES

  • Opportunity to benefit from property without the hassle of organising buying, letting or arranging sales

  • Your investment will be managed by experts

  • Opportunity to expose even small investments to a broad portfolio of properties and countries

  • Funds can use their buying power to arrange bulk discounts

  • Some funds have tax benefits. In the UK, investors can invest in many types of funds with money held in ISAs and even SIPPs (self invested personal pensions)

  • No sleepless nights over letting, tenants, vacancy rates and so on..

    Types of funds

    The types of funds on offer vary dramatically in their structure and their investment objectives. In the US and Australia, readers will be familiar with Real Estate Investment Trusts (REITs) which are regulated funds managed by major financial institutions which operate in a similar way to unit trusts. The UK doesn’t yet have REITs, even though they exist in much of the rest of the world. REITs have recently taken south-east Asia by storm and in the United States REITs have recently celebrated their fortieth birthday. In a discussion paper released with the 2005 budget the British government announced an intention to introduce REITS to Britain in 2006.

    Other forms of investment trust do however already exist. From the informal syndicate of friends to collective property funds, people are already buying property through a variety of different instruments.

    The rules and regulations surrounding investment funds makes describing their various forms difficult here, but in outline there are several different forms which are usually made available to different types of investor.

    Onshore or offshore

    Often funds will be referred to as offshore or onshore funds. This typically refers to the country they are domiciled in and therefore the jurisdiction which regulates their activity. In the UK for example, an onshore fund would refer to one that is regulated by the UK’s Financial Services Authority (FSA). Onshore funds need to meet certain criteria and the greater level of regulation usually allows them to be offered to a broader range of investors.

    Onshore funds will often be structured differently to offshore funds due to regulatory requirements. Often onshore funds will have greater liquidity making it easier for investors to sell their interest in the fund when they want to. (see open ended investment vehicles vs. close ended investment vehicles below).

    Maintaining the UK example, an offshore fund would not be regulated by the FSA. The fund would, however, be regulated by the financial regulator in the country in which it is domiciled. The domicile of an offshore fund will usually be in a jurisdiction with low taxation and a reliable financial system which investors have confidence in. Typical locations for offshore funds include Jersey, Guernsey, The Isle of Man and the British Virgin Islands.

    Whilst offshore funds are not regulated directly by the onshore regulator, the sale of shares in those funds is a regulated activity. In the UK, FSA regulations state that offshore funds can only be offered as an investment to ‘sophisticated’ or ‘high net worth’ investors. Investors need to self declare themselves as being in one of these categories before a qualified financial advisor can hand over details of the fund.


    More pages

    Page 1: Overview
    Page 2: Open ended investment vehicles vs. close ended investment vehicles

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