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Expat investors warned against dangers of property club funds
| Published: | 20 Jun at 6 PM |
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At first glance, property clubs seem the perfect real estate investment for expat investors unable to purchase buy-to-let properties outright.
Typically offered in expat destinations, property funds pool small investors’ cash into substantial amounts used to buy, renovate and manage buy-to-let property portfolios, offering shares in student accommodation and buy-to-let developments as well as timeshare resorts. Marketing strategies tout ‘guaranteed returns’ and forget to mention that the investments are unregulated, giving no protection to investors should the fund collapse.
Property funds are classified as unregulated collective investments (UCIS) and are outside the Financial Services Compensation Scheme and the Financial Ombudsman service. Investing holds a number of risks, and investors have only the courts to fall back on in the case of a compensation complaint.
Should investors need to withdraw their money, they must wait many months unless liquid funds are available. As a result of the recent failure of a £1 million student accommodation fund, its investors will see no compensation for at least two years.
Tax is another problem, as unregulated funds are not subject to tax breaks as are bonds, pensions and ISAs. High administration charges and set-up fees erode the ‘guaranteed’ yields and are often not disclosed to clients in a transparent manner.
In themselves, guaranteed yields are a risk, as fund managers cannot predict the future movement of the property market. Another fatal flaw involves the effect on profits of increased property prices.
For example, a property valued at £250,000 and rented out at £1,000 a month gives a yield of 4.8 per cent. In a buoyant market, the value may increase to £262,500, but the rental charge is still £1,000, reducing the yield to 4.57 per cent.
Rental contracts disallow rent increases pro-rata to the property’s value, meaning that, during a real estate boom, yields decrease dramatically. The property will reach its maximum commercial rental value whilst its resale value is still soaring, leaving the property club facing liquidation if it cannot meet investors’ guaranteed yields.
Typically offered in expat destinations, property funds pool small investors’ cash into substantial amounts used to buy, renovate and manage buy-to-let property portfolios, offering shares in student accommodation and buy-to-let developments as well as timeshare resorts. Marketing strategies tout ‘guaranteed returns’ and forget to mention that the investments are unregulated, giving no protection to investors should the fund collapse.
Property funds are classified as unregulated collective investments (UCIS) and are outside the Financial Services Compensation Scheme and the Financial Ombudsman service. Investing holds a number of risks, and investors have only the courts to fall back on in the case of a compensation complaint.
Should investors need to withdraw their money, they must wait many months unless liquid funds are available. As a result of the recent failure of a £1 million student accommodation fund, its investors will see no compensation for at least two years.
Tax is another problem, as unregulated funds are not subject to tax breaks as are bonds, pensions and ISAs. High administration charges and set-up fees erode the ‘guaranteed’ yields and are often not disclosed to clients in a transparent manner.
In themselves, guaranteed yields are a risk, as fund managers cannot predict the future movement of the property market. Another fatal flaw involves the effect on profits of increased property prices.
For example, a property valued at £250,000 and rented out at £1,000 a month gives a yield of 4.8 per cent. In a buoyant market, the value may increase to £262,500, but the rental charge is still £1,000, reducing the yield to 4.57 per cent.
Rental contracts disallow rent increases pro-rata to the property’s value, meaning that, during a real estate boom, yields decrease dramatically. The property will reach its maximum commercial rental value whilst its resale value is still soaring, leaving the property club facing liquidation if it cannot meet investors’ guaranteed yields.
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