With low interest rates likely to remain for some time, investors are turning to commercial property funds as a way of increasing their income.
A commercial property fund pools the investments ofthousands of investors to buy a range of commercial property such as retail shopping centres, office blocks and industrial warehouses. Investors can invest as little as £500 to obtain a share of the profits from the fund. Returns take two forms: rental income and capital growth.
A good commercial property fund will typically contain more than 50 different properties and several hundred tenants paying rent every month. This provides a significantly more secure income stream than investing in a single buy to let property.
Under new rules, many of these property funds have restructured so that the rental income is tax-free if the fund is held within an ISA. Rental returns are currently around 3 per cent, which is fairly decent at a time when interest rates are stuck at 0.5 per cent. On top of this, the properties in the portfolio should be increasing in value at least in line with inflation.
As with the domestic property market, there will be years when properties fall in value and in 2008 these funds were hit particularly hard when banks restricted their lending on property deals. Good property funds will hold a portion of the fund in cash to pay investors who want to cash in their investment. This means that the fund manager isn’t compelled to sell a property if several investors want their money back at the same time. As a further safeguard, the fund manager can restrict withdrawals if there is a sudden rush to cash in.
The steady income produced by these funds means that their volatility is a fraction of investing in the stock market. Investors should take care though as some funds buy shares in property companies and building firms instead of buying actual property and these types of funds can be just as risky as other share-based investments.
Property funds can also be held inside pension funds and trust funds and they form an important part of a balanced investment portfolio.
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814, email firstname.lastname@example.org or see www.hillsfinancialplanning.co.uk