Investors Club Together For Commercial Property

Taylor Scott International News August 30, 2013 By Tanya Powley Private investors are returning to the commercial property market by clubbing together to benefit from the improving outlook for real estate. While property syndicates fell in popularity during the downturn as prices plunged by up to 40 per cent, rising capital values have resulted in revived interest, say advisers. Commercial property syndicates allow a group of people to invest directly in real estate. The advantage of investing this way is that individuals can gain direct exposure to a higher-priced commercial property than they could buy on their own. According to IPD, the property value benchmarking group, capital values rose by 0.4 per cent in the second quarter of the year, halting an 18-month decline in which average values have fallen 3.5 per cent since September 2011. In response, property funds saw inflows of £140m in July 2013 – the highest level since July 2010, according to data from the Investment Management Association. In comparison to funds, syndicates are typically used by wealthy individuals or sophisticated investors with large amounts of money to invest. “They are a new slant on risk mitigation that entails the pooling of resources for investment in expensive commercial real estate assets,” said Simon Cookson, partner and head of UK real estate at DLA Piper, the law firm. “This pooling of resources is a fairly new phenomenon. . . It is often used to fund the purchase of high-profile or ‘trophy’ assets,” Mr Cookson added. Many private banks offer property investment syndicates to clients. HSBC Private Bank last year bought Broadgate West, an office in the City of London, for £290m on behalf of investors in its HSBC Club Programme. It has also bought an office building in Times Square in New York. “Since founding the HSBC Club Programme we have been able to provide HSBC clients with direct exposure to otherwise inaccessible real estate opportunities globally. The strong take-up from investors is certainly testament to the quality of the assets we have acquired,” said Paul Forshaw, head of real estate fund management at HSBC Alternative Investments. Time to add commercial property to your portfolio? Commercial property Five years on from the start of the downturn, the fortunes of the UK’s commercial property market remain extremely varied . . . Some property syndicates only purchase property in the UK, such as Ratcliffes, the chartered surveyor. It buys a property – typically a prime retail building – and then markets it to a number of its registered investors, breaking the gross purchase cost into a number of shares. Share sizes are rarely less than £25,000 or more than £250,000. According to Anthony Ratcliffe, about 40 per cent of its clients invest through their pension schemes, while approximately 25 per cent are property professionals themselves. “As the property market begins to stabilise after several years of falling values there is a revival of interest, attracted by the income returns which at about 6 per cent plus on well-tenanted property look very attractive against bond and cash returns,” said Mr Ratcliffe. Darius McDermott of Chelsea Financial Services, the financial adviser, said investors need to understand the risks involved. “It’s not an investment route I would suggest for the majority of people as minimum investments are generally substantial amounts, the investor just picks the property but has no control over the asset and the costs can be high, as they need to cover legal fees and other sundries,” he said. It’s also a very illiquid investment and, unlike a fund or investment trust, is not regulated, he added. Ratcliffes charges 1.25 per cent of the property purchase price, 1.5 per cent of the property sale price, 5 per cent of the gross annual rent for the property management and syndication administration and 7.5 per cent of the annual settled rent for a rent review. Mr Ratcliffe agrees there are risks, noting that a few of its syndicated properties where leverage was used are now at values below the level of debt due to the recent property crash. According to Mr McDermott, most investors will enjoy cheaper and more diversified access to commercial property through a fund or investment trust. He recommends the L&G UK Property fund. ——————————————- Paifs offer hopes of higher returns Investors now have additional choice as funds convert to new tax-efficient structures known as property authorised investment funds (Paifs). A Paif allows funds to pay gross dividends from property rental income with no corporation tax deducted. Only holders of individual savings accounts (Isas) and self-invested personal pensions (Sipps) and other pension investors can invest in a Paif. While the structure was introduced by HM Revenue & Customs in 2008, M&G Property Portfolio became the first large property fund to convert in January this year. This week, Standard Life Investments announced it had converted its £471m UK Property Fund into a Paif. According to Andrew Jackson, head of wholesale and listed real estate at Standard Life Investments, the estimated yield on the fund will increase from 3.61 per cent to 4.52 per cent for investors. Mr Jackson said: “In an environment of low growth and low yields, this is a particularly relevant time to provide long-term investors with an opportunity to access a more tax-efficient, diversified source of income through investment in real estate.” Taylor Scott International

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