Join the club and buy well

For the best access to the best property, affluent investors should group together, writes Roxane McMeeken.

Property has gained a “safe as houses” reputation in the current spate of market turbulence, racking up average returns of around 8 per cent in the past year in Europe. As a result, the question for high net worth individuals has become not whether to invest in the asset class, but how to do it. One approach with much to recommend itself is to form a limited partnership or “club”. Direct investment is fast becoming yesterday’s practice. A huge amount has to be invested before an investor’s portfolio even approaches diversification. Neil Cable, investment director at Edinburgh-based Standard Life Investments says, “direct property investment is lumpy. If you have half a million euros to invest you can buy a corner shop on the outskirts of Paris.” He advises investing through a fund and thus spreading property allocation across geographical locations, sectors and stages on building development. But few funds are available for the moderately affluent with less than e1m to put on the table. For example, there are only two funds open to retail investors in the UK – the Norwich Property Trust and Portfolio Property Fund. However, those with E20m or more can invest in a wide array of institutional products. The London-based io group is the latest institutional fund manager set to open its funds to high net worth individuals. While respectable returns can be gained through investing in funds (for example, the Norwich fund returned 10 per cent over the past five years), the main disadvantage for the investor is loss of control. Investment clubs Noel Manns, director of Europa Capital Partners in Barcelona, Frankfurt, London and Paris says that the best bet for affluent investors is to club together in small groups, which can be arranged either through banks such as Citibank, Barclays, Close Brothers and Coutts or syndicate runners like London’s Matrix Securities. Alternatively, investors can form a club entirely privately. Banks often gather groups of investors as large as 50 or more. But smaller groups of two or three retain considerable control over the property investment and management of the building. But the club will have to be well-informed to do well. Mr Manns warns that “European investors frequently go into property because they are attracted by the tax breaks offered by the asset class, but they really should look more carefully at the merit of the particular investment.” If you do buy well, the pickings will be rich. Mr Manns says that the beauty of this method of property investment is that on top of basic returns, “you can leverage property investment and that means you can get extra returns from that leverage.” He says investors can expect unleveraged returns of 10 per cent and leveraged returns of 15 per cent. Europa Capital runs private partnerships for groups of individual investors which Mr Manns says are “quite tax efficient”. Any borrowings can be set off against rent and in Europe there is typically only tax at the personal level and not at the level of the partnership, so investors are not taxed twice. The downside? One issue is tenant risk – the possibility for tenants to go bust. Mr Manns says the best way to guard against this is to diversify property investment, just as one would with any other asset class. Then there is lack of liquidity, the inability to get in and out of direct property investment as quickly as trading a stock or taking money out of a fund. Avoiding putting all your eggs in one basket can also help to counter against this to an extent. However, it’s worth keeping in mind that it can take many months to sell a property or even a stake in a property. A further point is lack of transparency. It is tough to value property unless it is about to be sold and even if the building is being sold, that can take months. But Andrew Bull, European director at LaSalle Investment Management, points out that income from property is known and he argues that investors tend to be much more focused on that than on capital value. Mr Manns says, “this lack of transparency means you can buy well because not all investors can see where the opportunities are”.