Commercial property can yield returns close to home

Despite talk of investment hotspots as far-flung as South Africa, Dubai and Bulgaria, it would seem that Irish investors are still keen on spinning money out of our nearest neighbours' assets.

Almost €3 billion of Irish investors' cash was poured into UK commercial property last year, and this year has seen the introduction of more and more products aimed at smaller investors - some with minimum investment sums as low as €1,000.

This week the Educational Building Society (EBS) became the latest financial institution to set up a commercial property fund, although this one, managed by Irish Life Investment Managers (ILIM), straddles the Irish and UK markets.

The building society says its property portfolio, which has a minimum investment requirement of €10,000, is suitable for people looking to invest for a minimum of five years.

The mix of Irish and UK properties across the retail, office and industrial sectors means that investors are not overexposed to a slump in any one sector, according to Sarah Loftus, EBS's head of savings and investments.

Diversification is one of the first things potential investors should check for in any unit-linked property fund, says Maeve Corr, director of Deloitte Pensions & Investments. However, potential investors will need to delve through quite a lot of small print before authorising an electronic transfer into any unit-linked property fund.

"Typically, a fund that buys a number of properties will be accessible during the term of the investment, however this can be restricted," says Corr.

"If property markets fall, the fund manager normally reserves the right to stop encashment for a fixed period of time, perhaps six months, or - as has been seen in the past - they can penalise investors for encashing units in a downturn by imposing a reduction factor to the value of the units being encashed."

The ability to take a regular income from the investment shouldn't be taken for granted, Corr adds.

"Normally, when people invest in property they expect it to generate some sort of income but this is not always the case."

Overall property market returns in the UK last year hit 18.3 per cent, but that doesn't mean that all investors in unit-linked property funds will have accrued such high returns during this period. Layers of charges can substantially reduce the profits that end up in their pockets.

Entry and exit fees, legal costs, stamp duty and administration charges are the typical costs that investors should expect.

"It is important to see what portion of your funds are being used to actually acquire the property and what goes in administration. Also, you will have to bear in mind that, when the life company goes to sell the property, there will be costs," says Corr.

Several UK commercial property funds, including ones sold by life assurance companies New Ireland and Hibernian, are geared. In other words, the investment managers will use investors' money as equity to borrow in order to purchase higher value or simply a bigger range of properties for the fund.

The idea is that investors can then profit from greater returns but, on the flipside, geared investments are far riskier than non-geared ones as the returns must beat the rate of interest being paid on the loans.

Gearing throws up new considerations for investors, Corr notes.

For example, they should check if the annual management charge on the fund applies to the equity portion or the gross amount (the value of the investment plus the loan). If it is the latter, investors could pay significantly higher fees than they initially expect, she says.

Investors should also ask what currency the borrowings are in. "If the fund invests in UK property, we would normally recommend that the borrowings are in the same currency to hedge any movements in the currency."