New entrant is hot property for investors

Sales and prices may be slowing down but houses can still be moneymakers, says Paul Burgin

Despite flagging residential sales and a slowing of house prices, Britain is still in love with the investment potential of property. Fund managers are cashing in with new property funds and there is now even a buy-to-let stock exchange, trading shares in a portfolio of homes. Advisers say future returns will be lower, but property is still a good way to diversify portfolios.

Despite flagging residential sales and a slowing of house prices, Britain is still in love with the investment potential of property. Fund managers are cashing in with new property funds and there is now even a buy-to-let stock exchange, trading shares in a portfolio of homes. Advisers say future returns will be lower, but property is still a good way to diversify portfolios.

Those with buy-to-let property have had a good run. Rental income has covered low-cost mortgage payments and house price increases have added to retirement nest eggs. But rising interest rates pushed down returns last year and many private owners appear to be pulling out of the market.

According to the annual IPD Residential Property index, such investments are now underperforming other investments, including equities. Total returns dropped considerably from 19.6 per cent per year in 2002 to 9.1 per cent last year.

While private investors are pulling out, professionals are piling in, buying up properties at good prices in an otherwise stagnant market. Estate agents hope they will prop up the market.

The news comes just as the latest property scheme opens for business. Opromark, a new property "stock" exchange, promises to open up the market for just £1. Working on similar principles to a stock exchange, investors buy and trade shares in a range of rental properties.

They then receive a share of the rental income and from gains in the value of their shares when they sell up. The exchange opens this week with 18 properties, ranging from a £30,000 Sunderland rental to a £500,000 property in Clapham, London.

"It works on the principle that investors can buy low-denomination shares in individual identified properties. We expect quite a lot of people to come along with £1 or £5 to start with," says Stephen Kenny, the chief executive of Opramark.

He hopes to attract younger professionals, looking to add property to their pensions or long-term savings, but who cannot afford to purchase a rental property outright. By diversifying into more properties, he says, investors can lower risk.

The traditional route to property diversification is to buy your own portfolio or invest in an investment or unit trust. Most options are for commercial property, although residential schemes are coming on stream, ahead of new tax-efficient legislation.

Setting up one's own commercial property portfolio is not recommended for anyone with less than £50m to spend.

Property funds are a far easier and lower-cost route, recently making it back into investment fashion. Unlike residential, commercial property returns have soared, beating equities over the past one, three, five and 10 years.

Pension companies all but abandoned property in the 1980s. They have been driven back to lower-volatility property by the tech bubble and the equity bear market. Private investors have followed, helping to quadruple fund inflows in recent years. Fund management groups are working hard to meet demand. Property funds invest directly in buildings or buy into property company shares, such as St Modwen, owner of the defunct MG Rover site at Longbridge.

Traditional funds include the £1.4bn Norwich Property Trust, the first regulated trust of its kind in the UK. It claims to have returned an average 10.34 per cent per year over the past 10 years. Another popular option with financial advisers has been New Star Property Fund which has trebled in size since 2003.

Onshore, regulated unit trusts like these are few and far between. Outdated rules mean they have to hold 20 per cent in cash, in case investors want out. This improves fund liquidity but does little to enhance potential returns. New rules mean regulated funds can invest 100 per cent in property if they wish.

Among the first to take advantage are Britannic Asset Management and Thames River Property Growth & Income. The Thames River fund mixes British property and European property shares.

Fund managers are eagerly awaiting news from the Treasury on the future shape of REITs - real estate investment trusts.

Widely available in the US, Australia, France and Holland, these offer tax advantages and simple access to property funds, both residential and commercial.

Gordon Brown promises they will be available in 2006, although much of the tax treatment and structure of the funds has yet to be finalised.

This has not stopped fund managers setting out their stalls in advance. A number of funds investing in overseas REITs are open for business and more are on their way, including a new Global Properties Securities fund from Schroders.

Neil Bridge, head of UK retail sales, explains the fund's rationale: "The UK property market has already done well and a lot of investors own property, buy-to-lets and the like.

"People have definitely increased their exposure to equity and now want more." He says that buying directly into property in some countries is difficult, hence the decision to select the equity route for the global fund.

He adds: "Liquidity is a big issue. The advantage of a properties securities fund is that it is tradeable - investors can get out if they want to. It is hugely inefficient to buy property outright in some countries."

Buying outright is not an issue for Chris Finch, founder of Tri Investments, whose European Residential Property fund recently got the green light from the Financial Services Authority. It invests in holiday villa developments and urban apartments, all off-plan, in former communist bloc countries.

Once completed, developments will be sold to foreign and local buyers and monies reinvested in other projects. Finch says investors can expect double-digit returns.

"We are quoting in excess of 10 per cent net returns. The response from financial advisers has exceeded expectations," says Finch.

The fund and others, including UK residential offers from Keydata, HSBC and Abbey, are jostling for a place in your pension portfolio.

At present, restrictions mean that residential property cannot be tax-protected in pension schemes. New rules will open up the market next April and independent advisers expect a flood of enquiries from investors.

"Most people don't really understand what they are getting into with commercial property funds. But they do understand residential housing. This interest could boost property prices again," says Elizabeth Gibling, life and pensions manager at adviser Chase de Vere.

While prices could pick up, she says investors should not be looking for the 20-per-cent-plus gains that have been seen in recent years. Nor should they place all their bets on the property market.

"The forecasts are all saying single figures for the next few years for most asset classes. Residential property can be volatile, so investors should always make sure that they have a properly balanced portfolio," she says.

The man behind Opromark

* The brain behind Opromark is no stranger to virtual exchanges. Stephen Kenny developed the software for Betfair, which in five years has become one of the UK's leading betting websites.

* He also helped develop software for OneSea.com, a maritime procurement exchange, matching shipping with suppliers in ports around the world.

* Kenny moved into IT almost by accident, having started his career as a trainee accountant at British Telecom. He moved into computing just as the company scrambled to value its assets ahead of its 1984 flotation.

* At 23, he joined the Ministry of Defence as a "low-level systems techie".

* From there, he moved to Sema Group, working on the EFTPOS electronic payment scheme in the late eighties. The ambitious project has only recently come to fruition with the introduction of chip and PIN.

* Kenny's first brush with the internet was writing systems for Stocknet, one of the first online stockbroking businesses, at the start of the dot.com boom.

* There, he first met colleagues who would eventually go on to form Betfair. Founder Andrew Black had already designed the basics when Kenny arrived at Black's Putney home to hone the underlying software.

* The whole thing was put together in months but has proved profitable. Betfair has 350,000 users.

* The company is considering a London float which could see it worth £500m. Kelly says he was offered a full-time position and personal holding in the company. He declined the offer, to work on his property exchange idea.

* Rather than just developing the software and leaving, he intends to stick around at Opromark. His ambition is to move into European property.

* He is unmarried and lives in Earls Court.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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